The rule that tells a central bank how to set interest rates in response to changes in economic activity is known as the
A)federal funds rule
B)interest rate rule
C)monetary growth rule
D)Taylor rule
E)Friedman rule

Question

Quizplus · Accepted Answer

The Taylor rule is a quantitative guideline that suggests how a central bank should adjust interest rates in response to changes in inflation and economic activity. It was developed by economist John Taylor and is widely used by policymakers around the world. The rule recommends that a central bank should raise interest rates when inflation is above target or when output is above potential, and lower rates when inflation is below target or when output is below potential. The other options (A, B, C, and E) are not commonly recognized rules for monetary policy.

The Rule That Tells a Central Bank How to Set