Write out the expression for the Taylor rule. Use the Taylor rule to explain how a decline in real GDP below potential GDP will affect the Federal Reserve's target for the federal funds rate

What will be an ideal response?


The Taylor rule states that the Fed should set the federal funds target so that it is equal to: the real equilibrium federal funds rate + the current inflation rate + (w1 ) × inflation gap + (w2 ) × output gap. The inflation gap is the difference between the current inflation rate and the target rate. The output gap is the percentage difference between real GDP and potential GDP. The values w1 and w2 are weights determined by the Fed. If the growth rate in real GDP is below potential GDP, then the output gap will be negative. This will lower the federal funds target.

Economics

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Economics

Which of the following contributes most to the reduction in income inequality?

A. Taxes B. Wealth C. Transfer payments D. Earned income tax credits

Economics