Question According to the Taylor rule, if there is a recessionary gap of 3 percent of potential output and inflation is 4 percent, what real interest rate will the Fed set? 2.5 percent 3 percent 1.5 percent 2 percent

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Transcribed Image Text: According to the Taylor rule, if there is a recessionary gap of 3 percent of potential output and inflation is 4 percent, what real interest rate will the Fed set? 2.5 percent 3 percent 1.5 percent 2 percent
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Transcribed Image Text: According to the Taylor rule, if there is a recessionary gap of 3 percent of potential output and inflation is 4 percent, what real interest rate will the Fed set? 2.5 percent 3 percent 1.5 percent 2 percent
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UL1WVG

c) 1.5 percent According to Taylor's rule r = p + 2 - 0.5y + 0.5 (p - 2) p - inflation rate = 4% = 0.04 y - percentage deviation of real GDP = 3% = 0.03 r - real interest rate r = p + 2 - 0.5y + 0.5 ( ... See the full answer