According to the Taylor rule, if inﬂation is 3 percent and there is an unemployment gap of −2 percent, the Fed's targeted interest rate should be
A) 7.5 percent.
B) 3 percent.
C) 2 percent.
D) 1 percent.

Question

Quizplus · Accepted Answer

The Taylor rule states that the targeted interest rate should be equal to the sum of the inflation rate, the equilibrium real interest rate, plus half the difference between the actual and target levels of inflation, plus half the difference between potential GDP and actual GDP. 
Using the Taylor rule equation, we get: 
Targeted interest rate = 3 + (0.5 x (3-2)) + (0.5 x (0-(-2))) = 7.5 percent

According to the Taylor Rule, If Inﬂation Is 3 Percent