According to the Taylor Rule, If Real GDP Rises 1

Multiple Choice

According to the Taylor rule, if real GDP rises 1.0 % over potential GDP, the Fed should, _____.

A) raise the federal funds rate by 5% relative to the inflation rate
B) raise the federal funds rate by 1% relative to the inflation rate
C) raise the federal funds rate by 2% relative to the inflation rate
D) raise the federal funds rate by 0.5% relative to the inflation rate
E) keep the federal funds rate at 4 percent