According to the Taylor rule, does the target for the federal ...

[sheilaspns]

According to the Taylor rule, does the target for the federal funds rate respond differently for an increase in inflation caused by an increase in aggregate demand and for an increase in inflation caused by a decrease in short-run aggregate supply?
 
  Explain whether there is or is not a difference in how the target for the federal funds rate changes.

Question 2

The cyclically adjusted budget is calculated at potential GDP.
 
  Indicate whether the statement is true or false

[Toya9913]

Answer to Question 1

The target for the federal funds rate responds differently. The current inflation rate and the inflation gap are the same in both cases, but the output gap differs. The output gap (percentage difference between real GDP and potential real GDP) will be positive for the inflation caused by an increase in aggregate demand, but negative for the inflation caused by a decrease in short-run aggregate supply. The target for the federal funds rate will be higher in the case of the increase in inflation caused by an increase in aggregate demand.

Answer to Question 2

TRUE