Question

Explain the Taylor rule for controlling the money supply.

Answer 1

Taylor rule is to focus on monetary policy of Central Bank to balance economic activities by making changes in Internet rates.The rule says that a right monetary policy will rely on 3 factors- rate of federal funds, fluctuations in real income and the price level.Taylor rule determines the regulation of economic activities with help of rate of federal funds depending on inflation ,differences between desired and actual rates of inflation, and output differences of actual outcomes and natural outcomes.According to this rule , in a situation where actual or current inflation is more than targeted inflation level , prescribes comparatively high rate of interest.It suggests that Federal reserve must increase the rates of interest where the inflation rate is high or in case where employment is more than full employment level and opposite to it,rate of interests should fall with decrease in inflation level and employment level.It shows that the rule depends on 3 factors

1) Targeted inflation level against actual inflation level

2) Full employment level against actual level of employment

3) Interest rates in short period appropriately stable with full employment level.