According to the Taylor rule, if the central bank’s announced inflation target is 2%, the current inflation rate is 2%, and output is 1% below the full-employment level, at what level should the central bank set the nominal interest rate?
A. 0.01
B. 0.02
C. 0.035
D. 0.04
E. 0.055
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The Taylor rule allows for strict inflation targeting as long as
A. the output coefficient is zero
B. the inflation coefficient is zero
C. the output coefficient is negative
D. the inflation coefficient is negative
E. none of the above
In the Taylor rule, if the output coefficient β is set to zero, then the central bank
A. is mostly concerned with maintaining full employment
B. always sets interest rates 2% above its inflation target
C. will aggressively lower interest rates as soon as output declines
D. engages in strict inflation targeting
E. none of the above
In the Taylor rule, if the output coefficient a is set to zero, then the central bank
A. is mostly concerned with maintaining a low inflation rate
B. will lower interest rates whenever it goes above 2 percent
C. will aggressively increase interest rates as soon as inflation rises
D. engages in real GDP targeting
E. none of the above
If a central bank engages in inflation targeting, then
A. it will not change interest rates in response to output fluctuations
B. it will change interest rates aggressively as soon as inflation or output changes
C. it will lower interest rates aggressively as soon as inflation heats up
D. it will increase interest rates aggressively as soon as aggregate supply increases
E. none of the above
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