Which of the following equations most accurately describes the Taylor rule?
A) πt = mt – yt + vt
B) mt = 0.04 + 2(ut – 0.052)
C) mt = πt + 0.5(πt – π*t) + 0.5(Yt –Y*t)
D) it = 2 + πt + 0.5(πt – π*t) + 0.5[100(Yt –Y*t)/Y*t]
E) it = 2 + 0.5[(πt – π*t)/πt] + 0.5[(Yt –Y*t)/Y*t]

Question

Which of the following equations most accurately describes the Taylor rule?  
A)  πt = mt – yt + vt	
B) 	mt = 0.04 + 2(ut – 0.052)
C)  mt = πt + 0.5(πt – π*t) + 0.5(Yt –Y*t)
D) 	it = 2 + πt + 0.5(πt – π*t) + 0.5[100(Yt –Y*t)/Y*t]
E)  	it = 2 + 0.5[(πt – π*t)/πt] + 0.5[(Yt –Y*t)/Y*t]

Quizplus · Accepted Answer

The Taylor rule is a guideline for setting interest rates according to changes in the inflation rate, the output gap, and the desired real interest rate. Equation D is the most accurate representation of the Taylor rule as it includes the current inflation rate (πt), the desired inflation rate (π*t), the output gap (Yt – Y*t), and the desired real interest rate (2%). The other equations either do not include all the necessary variables or include additional variables that are not part of the Taylor rule.

Which of the Following Equations Most Accurately Describes the Taylor