According to the Taylor rule, if the target rate of inﬂation for the Fed is 2 percent and inﬂation rises to 3 percent at full unemployment, then the Fed should
A) raise the real federal funds rate by one percentage point.
B) lower the real federal funds rate by one percentage point.
C) raise their targeted interest rate by half of a percentage point.
D) lower their targeted interest rate by half of a percentage point.

Question

Quizplus · Accepted Answer

According to the Taylor rule, when inﬂation rises to 3 percent at full unemployment, the Fed should raise their targeted interest rate by half of a percentage point. The Taylor rule suggests that the real federal funds rate should be adjusted to reflect the desired inflation rate and potential output level. In this scenario, the target rate of inflation is 2 percent, and the actual inflation rate is 1 percentage point higher. Therefore, the Fed should increase their targeted interest rate by half of a percentage point to bring inflation back to the desired level.

According to the Taylor Rule, If the Target Rate of Inﬂation