Taylor Rule. Suppose the Quarter 1 2020 federal funds rate was 0.25%. If the output gap...

Taylor Rule. Suppose the Quarter 1 2020 federal funds rate was 0.25%. If the output gap is -7% and the inflation gap is -5%, according to the Taylor Rule, what is the Fed’s target rate for Quarter 2 of 2020?

Expert Solution

According to Taylor Rule,

Fed’s target rate = Federal funds rate + 0.5 (Output gap) + 0.5 * (Inflation gap).

Fed’s target rate for Quarter 2 of 2020 = 0.25% + 0.5 (-7%) + 0.5 * (-5%)

= 0.25% - 3.5% - 2.5%

= -5.75%

Rahul Sunny answered 1 year ago

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