Final answer:
According to the Taylor rule, if the inflation rate is one percentage point below the target of 2%, then the Federal Reserve should implement expansionary monetary policy to stimulate the economy.
Step-by-step explanation:
The Taylor rule is a monetary policy guideline that suggests how central banks should adjust interest rates in response to changes in inflation and the output gap. According to the Taylor rule, if the inflation rate is one percentage point below the target of 2%, then the Federal Reserve (Fed) should implement expansionary monetary policy to stimulate the economy. This typically involves lowering interest rates to encourage borrowing and spending, which can help boost economic growth and increase inflation.
For example, if the inflation rate is 1% and the target is 2%, the Fed may lower interest rates to encourage borrowing and investment, which can stimulate economic activity and potentially raise inflation back to the target level.