Question

According to the monetary policy rule, under what condition does the real interest rate equal the natural rate of interest? What does the Taylor principle suggest for monetary policy design?

Answer 1

According to the monetary policy rule when there is neither inflation nor deflation in the economy in this condition the real interest rate equal to the natural rate of interest.

The Taylor Rule suggests that the Federal Reserve should raise rates when inflation is above target or when gross domestic product (GDP) growth is too high and above potential. It also suggests that the Fed should lower rates when inflation is below the target level or when GDP growth is too slow and below potential.