Question

Which of the following are true according to the Taylor rule:

A. the rate of money growth should be set at 4 percent per year.
B. if inflation rises by 1 percentage point above its target, then the Fed should raise the real federal funds rate by one-half a percentage point.
C. for every 1 percentage point that unemployment exceeds the natural rate of unemployment, there is a 2-percentage-point gap between potential and actual GDP. D. growth in the money supply should be limited to the long-run average growth rate of real GDP.

Answer 1

The correct answer is option B.

Step-by-step explanation:

Taylor's rule is an interest rate forecasting model given by John Taylor. It advocates that the government should change the federal funds rate with the change in the inflation rate.

The Taylor rule formula suggests that the inflation rate is the difference nominal interest rate and real interest rate.

Taylor suggests that the interest rate should be 1.5 times the inflation rate. So if the inflation rate is 1%, the interest rate should be 1.5%.