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Alexandra [31]
3 years ago
5

Using Taylor's rule, when the equilibrium real federal funds rate is 2 percent, there is no output gap, the actual inflation rat

e is zero, and the target inflation rate is 2 percent, the nominal federal funds rate should be Question 3 options: A) 0 percent. B) 1 percent. C) 2 percent. D) 3 percent.
Business
1 answer:
SCORPION-xisa [38]3 years ago
7 0

Answer:

B) 1%

Explanation:

Taylor's rule formula is as follow:

Target rate = Neutral rate + 0.5 x (Expected GDP growth rate - Long-term GDP growth rate) + 0.5 x (Expected Inflation rate - Target inflation rate)

--> Target rate = 2% + 0.5 x (0) + 0.5 x (0 - 2%)

  --> Target rate = 2% - 1% = 1%

Nominal federal funds rate should be 1%

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