Suppose the Fed has set the federal funds rate at 4.5 percent using the Taylor rule. If the inflation rate increases by 1 percentage point and the weight on inflation gap is 0.5, all other variables remain unchanged, the federal funds rate should

A. decrease to 3.5 percent.
B. decrease to 4 percent.
C. increase to 5.5 percent.
D. increase to 5 percent.


Answer: D

Business

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