According to the Taylor rule, if the current inflation rate is 3.2%, output is 1% above the full-employment level, and the central bank's announced inflation target is 2%, at what level should the central bank set the nominal interest rate?
A)2)2%
B)3)3%
C)4)4%
D)5)8%
E)6)3%

Question

Quizplus · Accepted Answer

The Taylor rule suggests that the central bank should set the nominal interest rate to 3% in this situation. The Taylor rule is a formula that central banks use to set interest rates. It takes into account the current inflation rate, the output gap, and the central bank's inflation target. In this case, the current inflation rate is 3.2%, output is 1% above the full-employment level, and the central bank's announced inflation target is 2%. Plugging these values into the Taylor rule formula, we get a nominal interest rate of 3%.

According to the Taylor Rule, If the Current Inflation Rate