According to the Taylor rule, if the inﬂation rate is one percentage point below the target of 2 percent but at full employment, 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, if the inflation rate is one percentage point below the target of 2 percent but at full employment, the Fed should lower their targeted interest rate by half of a percentage point. This is because lower interest rates can stimulate borrowing and spending, which can increase inflation towards the target rate of 2 percent.

According to the Taylor Rule, If the Inﬂation Rate Is