Question

According to the Taylor rule what is the federal funds target rate under the following​ conditions? follows Equilibrium real federal funds rate equals 2​% follows Target rate of inflation equals 2​% follows Current inflation rate equals 1​% follows Real GDP is 1​% below potential real GDP The federal funds target rate equals nothing​%. ​(Enter your response rounded to one decimal​place.)

Answer 1

1%

Step-by-step explanation:

Taylor's rule formula is as follow:

Target rate = Neutral rate + 0.5 x (Expected GDP growth rate - Long-term GDP growth rate) + 0.5 x (Expected Inflation rate - Target inflation rate)

Target rate = 2% + 0.5 x (-1%) + 0.5 x (1% - 2%)

Target rate = 1%