29. Based on how the Taylor rule is applied by Li’s team, the Central Bank’s optimal short-term
rate is closest to:
A. 1.5%.
B. 2.0%.
C. 2.8%.
Answer = B
“Capital Market Expectations,” John P. Calverley, Alan M. Meder, Brian D. Singer, and Renato
Staub
2013 Modular Level III, Vol. 3, Reading 18, Section 4.1.5.3
Study Session 6–18–h
Demonstrate the use of the Taylor’s rule to predict central bank behavior.
B is correct.
The Taylor rule (Equation 12 p. 66) sets the optimal short-term rate as:
Neutral rate + 0.5 × (GDP growth forecast – GDP growth trend) + 0.5 × (Inflation forecast –
Inflation target)
Applying numbers from Exhibit 3,
( ) ( ).
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