According to the Taylor rule, the Fed should: A. lower the fed funds rate by 2% if inflation rises 1% above its target of 1% B. raise the fed funds rate by 2% if inflation rises 1% above its target of 1% C. lower the fed funds rate by 0.5% if inflation rises 1% above its target of 2% D. raise the fed funds rate by 0.5% if inflation rises 1% above its target of 2%

Question

Social Studies

Victor Randolph

20 July, 03:16

According to the Taylor rule, the Fed should: A. lower the fed funds rate by 2% if inflation rises 1% above its target of 1% B. raise the fed funds rate by 2% if inflation rises 1% above its target of 1% C. lower the fed funds rate by 0.5% if inflation rises 1% above its target of 2% D. raise the fed funds rate by 0.5% if inflation rises 1% above its target of 2%

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Answers (1)

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Jett · Answer 1

correct option is D raise the fed funds rate by 0.5% if inflation rises 1% above its target of 2%

Explanation:

solution

Taylor Rule is invented in 1992 and it is interest rate forecasting model

As the product of John Taylor Rule is the 3 number

interest rate inflation rate GDP rate

and Taylor rule is that when GDP is equal to potential GDP and inflation rate is at its target rate of 2%

and the federal funds target rate should be 4%

so we can say here correct option is D raise the fed funds rate by 0.5% if inflation rises 1% above its target of 2%