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4 November, 09:13

Using Taylor's rule, when the equilibrium real federal funds rate is 2 percent, there is no output gap, the actual inflation rate is zero, and the target inflation rate is 2 percent, the nominal federal funds rate should be Question 3 options: A) 0 percent. B) 1 percent. C) 2 percent. D) 3 percent.

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  1. 4 November, 10:40
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    B) 1%

    Explanation:

    Taylor's rule formula is as follow:

    Target rate = Neutral rate + 0.5 x (Expected GDP growth rate - Long-term GDP growth rate) + 0.5 x (Expected Inflation rate - Target inflation rate)

    --> Target rate = 2% + 0.5 x (0) + 0.5 x (0 - 2%)

    --> Target rate = 2% - 1% = 1%

    Nominal federal funds rate should be 1%
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