Monetary Policy: End of Chapter Problems

12. Some economists have argued that the spread between the Taylor rule target and the federal funds rate between 2003 and 2007 created the housing bubble that led to the financial crisis of2008.

Select all possible ways the housing bubble at the beginning of the 21st century may have caused the Taylor rule target to exceed the actual federal funds rate.

Increased aggregate demand associated with the housing bubble contributed to a positive output gap.

The housing bubble caused prices of housing and related goods to rise, contributing to higher inflation.

Decreased aggregate demand associated with the housing bubble contributed to a negative output gap.

The housing bubble caused prices of housing and related goods to fall, contributing to lower inflation.