What is the basic purpose of the Taylor rule?
What will be an ideal response?
The Taylor rule is a rule of thumb that targets real interest rates in the economy by taking into account changes in real GDP and inflation. The key purpose is to have the Fed justify its action relative to the rule. Following such a rule would make the Fed more accountable for its actions. It would also permit market participants to do a better job of predicting Fed behavior and thus reduce uncertainty about monetary policy. The rule, however, is not a permanent one. Should economic conditions require it, the Fed has the discretion to suspend following the rule, but would still have to justify its action in that case.
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Professor Tabarrok suggests that monetary policy is both an art and a science because of the complexity of answering all of the following questions EXCEPT:
A. how to use monetary policy tools. B. where to apply monetary policy tools. C. when to use monetary policy tools. D. which monetary policy tools to use.
Assume that the price of a futures contract is higher than the price of the underlying security during the delivery period. Arbitrageurs would
A) buy the futures, simultaneously sell the underlying asset, and pocket the price difference. B) sell the futures, simultaneously buy the underlying asset, and pocket the price difference. C) sell the futures, simultaneously sell the underlying asset, and pocket the price difference. D) buy the futures, simultaneously buy the underlying asset, and pocket the price difference.