Question

According to the Taylor rule, if inflation is 9% and the GDP gap is 4%, what is the recommendation for the federal funds rate target?

Answer 1

Answer: 16.5%

Step-by-step explanation:

The Taylor Rule suggests that the Federal reserve should raise the fed funds rate if inflation rates are above the targeted rates and/ or if GDP is growing at a higher rate than it potentially should.

The rate is calculated as;

Federal funds rate target = (1.5 * Inflation rate) + (0.5 * GDP gap) + 1

= (1.5 * 9%) + (0.5 * 4%) + 1%

= 13.5% + 2% + 1

= 16.5%