If the inflation rate target is 2%,the current inflation rate is also 2%,and the output gap is zero,then according to the Taylor rule,the nominal federal funds rate should be ________ percent.
A)zero
B)two
C)four
D)three
E)none of the above

Question

Quizplus · Accepted Answer

The Taylor rule formula is: Federal Funds Rate = Natural Rate of Interest + Current Inflation + 0.5(Inflation Gap) + 0.5(Output Gap). Assuming the natural rate of interest is 2% (a common assumption), and given that the current inflation is 2%, the inflation gap is 0 (since the target inflation is also 2%), and the output gap is 0, the calculation would be: 2% (Natural Rate) + 2% (Current Inflation) = 4%. Therefore, according to the Taylor rule, the nominal federal funds rate should be 4 percent.

If the Inflation Rate Target Is 2%,the Current Inflation Rate