Define the Taylor rule.
What will be an ideal response?
The Taylor rule is a rule of thumb used by the Federal Reserve to target the Federal funds rate. The Taylor rule assumes a target inflation rate of 2% and has three parts. First, if real GDP rises by 1% above potential GDP, the Fed should raise the Federal funds rate by one-half of a percentage point (the opposite is true if GDP is 1% below potential GDP). Second, if inflation rises by 1% above the 2% target, the Fed should raise the Federal funds rate by one-half of a percentage point (the opposite is true if inflation lowers below the target by 1%). Lastly, when real GDP equals potential GDP and inflation meets the target rate, the Federal funds rate should remain at about 4%—implying a real interest rate of 2%.
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Currently, the U.S. national income and product accounts (NIPA) use what type of price index to calculate real GDP?
A) Fixed-weight B) Variable-weight C) Chain-weight D) Heavy-weight
If the price level is increasing and output is falling, which of the following could be the reason?
a. A negative demand shock b. A positive supply shock c. A positive supply shock combined with a positive demand shock d. A negative supply shock e. A positive demand shock
If the output price of a product rises, the demand for capital will increase, raising the rental price of capital
a. True b. False Indicate whether the statement is true or false
When it comes to ________ goods, it is important to remember only one level of output can be realized and consumers are ________ for that level.
A. private; willing to pay different amounts B. public; willing to pay different amounts C. private; only willing to pay the same amount D. public; only willing to pay the same amount