According to the Taylor rule, the Fed will set the federal funds rate target based on which of the following?
A. the proportionate gap between actual real GDP and a measure of potential real GDP
B. an estimated long-run real interest rate
C. the current deviation of the actual inflation rate from the Fed's inflation objective
D. all of these
Answer: D
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You explain to your roommate Surya, who makes beaded headbands, about an economic theory which asserts that consumers will purchase more of a product at lower prices than they will at higher prices
She contends that the theory is incorrect because over the past two years she has lowered the price of her headbands and yet has seen a decrease in sales. How would you respond to Surya? A) I will explain to her that she is making the error of reverse causality: it is the decrease in demand that has caused her to lower her prices. B) Surya is right; she has evidence to back her claim. The theory must be erroneous. C) Surya is making the mistake of assuming that correlation implies causation. D) I will explain to her that there are some omitted variables that have contributed to a decrease in her sales such as changes in income.
Suppose the production of a good results in positive externalities. If output occurs at the intersection of the marginal social benefits curve and the supply curve, then
A. output will be at the socially optimal level. B. the price of the product will be the same as it was when all benefits were not taken into account. C. more output will be produced than if all benefits were not taken into account. D. a and c E. a, b, and c
The base year for a price index is the year_____
a. in which prices were lowest b. in which prices were highest c. in which real output was the largest d. in which prices were stable e. that serves as a reference point
A government-imposed price ceiling set below the market's equilibrium price will create an excess demand for a product. As a result of the excess demand, either the demand curve will tend to shift to the left or the supply curve will shift to the right-or both
a. True b. False