Tactics: The Taylor Rule
1) According to the Taylor rule, the Fed should raise the federal funds interest rate when inflation ________ the Fed”s inflation target or when real GDP ________ the Fed”s output target.
A) rises above; drops below
B) drops below; drops below
C) rises above; rises above
D) drops below; rises above
2) Using Taylor”s rule, when the equilibrium real federal funds rate is 3 percent, the positive output gap is 2 percent, the target inflation rate is 1 percent, and the actual inflation rate is 2 percent, the nominal federal funds rate target should be
A) 5 percent.
B) 5.5 percent.
C) 6 percent.
D) 6.5 percent.
3) Using Taylor”s rule, when the equilibrium real federal funds rate is 2 percent, there is no output gap, the actual inflation rate is zero, and the target inflation rate is 2 percent, the nominal federal funds rate should be
A) 0 percent.
B) 1 percent.
C) 2 percent.
D) 3 percent.
4) According to the Taylor Principle, when the inflation rate rises, the nominal interest rate should be ________ by ________ than the inflation rate increase.
A) increased; more
B) increased; less
C) decreased; more
D) decreased; less