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According to the Taylor Rule, the Fed will increase Federal Funds rate if there is -positive...

According to the Taylor Rule, the Fed will increase Federal Funds rate if there is

-positive output gap or negative inflation gap

-negative output gap or positive inflation gap

-positive output or positive inflation gap

-negative output or negative inflation gap

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Answer #1

An increase in the federal funds rate is likely to depress the market by shifting the aggregate demand curve to the left and reducing the output gap as well as inflation gap. output gap is the difference between actual output and potential output and inflation gap is the difference between actual inflation and target inflation.

Therefore, federal funds rate would be higher when output gap and inflation gap are positive. Select positive output gap or positive inflation gap

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