the economics of money, banking, and financial markets

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4. 
   

   Using Taylor's rule, when the equilibrium real overnight rate is 3 percent, the positive output
   gap is 2 percent, the target inflation rate is 1 percent, and the actual inflation rate is 2 percent, the
   nominal overnight rate target should be ____.
   A) 5 percent
   B) 5.5 percent
   C) 6 percent
   D) 6.5 percent
   Answer: D
   Diff: 1 Type: MC Page Ref: 457
   Skill: Applied
   Objective List: 18.1 Assess the different types of monetary policy strategy

   
   


5. 
   

   Using Taylor's rule, when the equilibrium real overnight rate is 2 percent, there is no output
   gap, the actual inflation rate is zero, and the target inflation rate is 2 percent, the nominal
   overnight rate should be ____.
   A) 0 percent
   B) 1 percent
   C) 2 percent
   D) 3 percent
   Answer: B
   Diff: 1 Type: MC Page Ref: 457
   Skill: Applied
   Objective List: 18.1 Assess the different types of monetary policy strategy

   
   


6. 
   

   According to the Taylor Principle, when the inflation rate rises, the nominal interest rate
   should be ____ by ____ than the inflation rate increase.
   A) increased; more
   B) increased; less
   C) decreased; more
   D) decreased; less
   Answer: A
   Diff: 1 Type: MC Page Ref: 479
   Skill: Recall
   Objective List: 18.1 Assess the different types of monetary policy strategy

   
   


7. 
   

   If the Taylor Principle is not followed and nominal interest rates are increased by less than the
   increase in the inflation rate, then real interest rates will ____ and monetary policy will be
   too ____.
   A) rise; tight
   B) rise; loose
   C) fall; tight
   D) fall; loose
   Answer: D
   Diff: 3 Type: MC Page Ref: 458
   Skill: Applied
   Objective List: 18.1 Assess the different types of monetary policy strategy