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 1.5 percent and inflation rate is 3 percent,the output gap is ________.
A) −6 percent
B) 1.5 percent
C) 4.5 percent
D) 6 percent

Question

Quizplus · Accepted Answer

The Taylor rule formula is: Federal Funds Rate = Inflation Rate + Real Equilibrium Federal Funds Rate + 0.5 * (Inflation Gap) + 0.5 * (Output Gap). Given the target rates are zero, the equation simplifies to 1.5% = 3% + 0.5 * (Output Gap). Solving for the output gap gives -6%.

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