Question

According to the Taylor rule if the target rate of inflation for the Fed is 2 percent and real GDP rises by 1 percent above potential GDP, then the Fed should_______________.a. raise the real federal funds by one percentage pointb. lower the real federal funds rate by one percentage pointc. raise the real federal funds rate by half of a percentage pointd. lower the real rederal funds rate by half of a percentage point

Answer 1

Answer:

C. raise the real federal funds rate by half of a percentage point

Explanation:

As per the Taylor rule, If inflation rate and target inflation rates are same and real GDP exceeds potential GDP by 1%, then real federal fund rates should increase by .5%. It is as per the Taylor rule formula.