Suppose the inflation rate target is zero and the long-run federal funds target is also zero.If the federal funds rate set using the Taylor rule is 2 percent and output exceeds the trend output level by 1 percent,the inflation rate is ________.
A) ‒0.5 percent
B) 1 percent
C) 2.5 percent
D) 3 percent

Question

Quizplus · Accepted Answer

The Taylor rule formula is: Federal Funds Rate = Inflation Rate + 0.5*(Inflation Gap) + 0.5*(Output Gap) + Long-run Federal Funds Rate. Given the federal funds rate is 2%, the long-run rate is 0%, and the output gap is 1%, solving for the inflation rate gives 1%.

Suppose the Inflation Rate Target Is Zero and the Long-Run