The Taylor Rule Can Be Written as FF Rate =

Multiple Choice

The Taylor rule can be written as FF rate = π + 2.0 + 0.5(π - 2.0) + 0.5(GDP gap) , where FF rate is the nominal federal funds rate, π is the inflation rate, and the GDP gap is the percentage deviation of real GDP from its natural level. If inflation is 2 percent and the GDP gap is -2 percent, then according to the Taylor rule, the Fed should set the nominal federal funds rate at percent.

A) 2
B) 3
C) 4
D) 5