Question

Using the taylor rule, if the current inflation rate equals the target inflation rate and real gdp equals potential gdp, then the federal funds target rate equals the?

Answer 1

Using Taylor's rule, if the current inflation rate equals the target inflation rate and real GDP equals potential GDP, then the target federal funds rate equals the current inflation rate plus the real equilibrium federal funds rate.

Inflation can be defined as an increase in prices, which can be translated as a decrease in purchasing power over time. The rate of decline in people's purchasing power can be reflected in the increase in the average price of a selected basket of goods and services over a period of time. An increase in price, which is often expressed as a percentage, means that one unit of currency is effectively buying less than it did in the previous period. Inflation can be contrasted with deflation, which occurs when prices fall and people's purchasing power increases.

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