#1 selections are (Raise / Lower) (1%, .75%, .5%, .25%) #2 selections are (Raise

Question

#1 selections are (Raise / Lower) (1%, .75%, .5%, .25%)

#2 selections are (Raise / Lower) (2.25%, 2%, 1.5%, 1.75%)

8. Using the Taylor rule The Taylor rule specifies how policymakers should set the federal funds rate target. Suppose that US real GDP falls 1% below potential GDP, all else constant. According to the Taylor rule, the Fed should lower the federal funds rate target by Suppose instead that the U.S. inflation rate falls by 1%, all else constant. According to the Taylor rule, the Fed should raise the federal funds rate target by

Explanation / Answer

Answer to blank 1: Lower

Answer to blank 2: 0.5%

Explanation: For each 1% fall in real GDP below potential GDP, the Fed should lower the real Federal funds rate by ½ percentage point.

Answer to blank 3: raise

Answer to blank 4: 1.5%

Explanation : Taylor recommends the real interest rate should be 1.5 times the inflation rate.

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