The Taylor rule specifies
A)a constant relationship between interest rates and output.
B)a constant relationship between interest rates,output,and inflation.
C)a flexible relationship between interest rates,output,and inflation.
D)a fixed relationship between inflation and output.
E)none of the above.

Question

Quizplus · Accepted Answer

The Taylor rule specifies a constant relationship between interest rates, output, and inflation. It suggests that the central bank should adjust short-term interest rates in response to deviations of inflation from its target and deviations of output from its potential level. The formula for the Taylor rule is: r = p + 0.5y + 0.5(p - 2) where r is the nominal interest rate, p is the inflation rate, and y is the output gap (the difference between actual output and potential output). By using this rule, central banks can maintain price stability and promote economic growth.

The Taylor Rule Specifies