CFA Practice Question

There are 136 practice questions for this study session.

CFA Practice Question

If the short-term real interest rate is 1.5%, the inflation rate is 5%, the target rate of inflation is 2%, and the output gap is 3%, the appropriate policy rate implied in the Taylor rule would be ______.
A. 7.5%
B. 8.5%
C. 9.5%
Explanation: 1.5% + 1.5 x 5% - 0.5 x 2% + 0.5 x 3% = 9.5%

The inflation rate is way higher than the target rate and the economy is overheating. The central bank should raise its policy rate to cool down the economy.

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