Consider the Following Rule for Monetary Policy: R = 2

Consider the following rule for monetary policy: r = 2 percent + π + 1/2y - y*) /y* + 1/2π - π*) , where r is the nominal federal funds rate, y is real GDP, y* is an estimate of the natural rate of output, π is the inflation rate, and π* is the inflation target. Other things the same, if the inflation rate rises by 1 percentage point this rule says the Fed should increase the nominal federal funds rate by

A) 1/2 percentage point
B) 1 percentage point
C) 1 and 1/2 percentage points
D) 3 and 1/2 percentage points

Correct Answer:

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