The key policy target in the Taylor rule is the:
A) money supply.
B) federal funds interest rate.
C) average tax rate.
D) full-employment budget.

Question

Quizplus · Accepted Answer

The Taylor rule is a guideline for the Federal Reserve to set the federal funds interest rate based on the current inflation rate and the output gap (difference between potential and actual GDP). The rule recommends increasing interest rates when inflation is high or when the output gap is positive (i.e. actual GDP is above potential), and decreasing interest rates when inflation is low or when the output gap is negative (i.e. actual GDP is below potential). Money supply, average tax rate, and full-employment budget are not the key policy targets in the Taylor rule.

The Key Policy Target in the Taylor Rule Is The