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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

Suppose the inflation rate is 4 percent and the GDP gap is 5 percent. What is the Taylor rule recommendation for the federal funds rate target?

To determine

The federal funds rate target.

Explanation

It is given that the inflation rate is 4 percent and the GDP gap is 5 percent.

According to the Taylor rule, the federal funds target rate can be calculated using Equation (1) as follows:

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

The federal funds target rate can be calculated by substituting

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