Given the following formula for the Taylor rule:Target federal funds rate = natural rate of interest + current inflation + 1/2(inflation gap) +1/2(output gap) If the inflation rate in the economy were to fall by 2% below the target inflation rate, the target federal funds rate would:

A. Remain at 2.5%.
B. Increase by 1.0%.
C. Decrease by 3.0%.
D. Decrease by 1.0%.


Answer: C

Economics

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vertical S curve at Q = 1

What will be an ideal response?

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Economics