Question
(a) If the positive inflation gap increases by 5%, the Federal Reserve should raise the nominal target federal funds rate by exactly 5% according to
(a) "If the positive inflation gap increases by 5%, the Federal Reserve should raise the nominal target federal funds rate by exactly 5% according to the Taylor rule." Is the above statement TRUE? Explain. (6 marks)
(b) Explain the motivation of following the Taylor rule in setting the nominal target federal funds rate. (4 marks)
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Principles of Microeconomics
Authors: N. Gregory Mankiw
8th edition
1305971493, 978-1305971493
