Suppose a Country Faces the Following Situation: Inflation Rate =

Multiple Choice

Suppose a country faces the following situation: inflation rate = 4%; target inflation rate = 2%; current federal funds rate = 3%; and current GDP 4% below full-employment GDP. Which statement correctly describes monetary policy actions that would be recommended according to inflation targeting and the Taylor rule?

A) Inflation targeting would recommend contractionary policy; the Taylor rule would recommend contractionary policy.
B) Inflation targeting would recommend contractionary policy; the Taylor rule would recommend expansionary policy.
C) Inflation targeting would recommend expansionary policy; the Taylor rule would recommend expansionary policy.
D) Inflation targeting would recommend expansionary policy; the Taylor rule would recommend contractionary policy.