Suppose that current inflation is less than the central bank\'s inflation target

Question

Suppose that current inflation is less than the central bank's inflation target The Taylor Rule guides the central bank to do the following O Increase the Federal Funds rate, which will increase short term interest rates in the economy and increase investment and output O Decrease the Federal Funds rate. which will decrease short term interest rates in the economy and increase investment and output O Decrease the Federal Funds rate, which will decrease long term interest rates in the economy and increase investment and output O Decrease long term bond yields through the purchasing of long term treasury securities via open market operations

Explanation / Answer

Option is B. Decrease the federal funds rate which will decrease the short term investment rates.

According to Taylor rule, if the inflation rate is lower than the target rate, the interest rates will be lowered.

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