According to the Taylor Rule, if the output gap falls, the targeted interest rate should fall as well, ceteris paribus.

Question

Quizplus · Accepted Answer

The Taylor Rule suggests that as the output gap decreases, which indicates that the economy is growing closer to its potential, the targeted interest rate should decrease to support growth and stabilization. However, it is important to note that other factors such as inflation, inflation expectations, and the natural rate of interest also play a role in determining the targeted interest rate.

According to the Taylor Rule, If the Output Gap Falls