According to the Taylor rule, if the current inﬂation rate is 5 percent and the current unemployment rate is 3.8 percent, the Fed's targeted interest rate should be
A) 5 percent.
B) 8.8 percent.
C) 1.2 percent.
D) 9 percent.

Question

Quizplus · Accepted Answer

The Taylor rule suggests setting the interest rate based on the inflation rate, the equilibrium real interest rate, the deviation of actual inflation from the target inflation, and the deviation of actual GDP from potential GDP. With a high inflation rate of 5% and low unemployment, the rule would suggest a higher interest rate, closer to 9%.

According to the Taylor Rule, If the Current Inﬂation Rate