Question

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%

Answer 1

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

Step-by-step 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

1. interest rate
2. inflation rate
3. 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%