Question

Suppose that the Fed has decided to utilize the Taylor rule to implement monetary policy. If the actual federal funds rate target is presently below the level specified by the Taylor rule and has been lower then this level for several weeks, then this would be a signal thatA) monetary policy is very expansionary.B) monetary policy is very contractionary.C) the Fed should switch to targeting the money supply instead of the federal funds rate.D) the Fed should halt efforts to target the money supply.

Answer 1

The correct answer is:

A) monetary policy is very expansionary.

Step-by-step explanation:

In this case the Taylor Rule states that the Fed must increase rates as the target of the inflation is up the Gross Domestic Product. Therefore, according to the expansionary policy, the central bank employs certain mechanisms in order to look with favor on the economy. The main idea of this strategy is to be able to lower the interest rates and also to increase the aggregate demand.