According to the Taylor rule:
a. if inflation falls by 1 percentage point below its target of 2 percent, then the Fed should raise the real federal funds rate by one-half a percentage point.
b. all of these are appropriate Fed actions.
c. when real GDP is equal to potential GDP and inflation is equal to its target of 4 percent, the federal funds rate should be kept at 2 percent.
d. if real GDP rises by 2 percent above potential GDP, the Fed should raise the real federal funds rate by 1 percentage point.
Ans: d. if real GDP rises by 2 percent above potential GDP, the Fed should raise the real federal funds rate by 1 percentage point.
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