Question

The Taylor Rule puts _________ as much weight on closing the unemployment gap as it does on closing the inflation gap.

a. just

b. twice

c. half

d. ten times

Short answer

The correct option is ‘b.twice’.

Step-by-step solution

Step 1. Reason for the correct option 

The closing gap is twice as high in the case of unemployment as in inflation. The Taylor rule uses 0.5 as the coefficient for inflation and 1.0 as the coefficient for unemployment. Therefore, we can conclude that the Taylor rule gives twice as much weight to close the unemployment gap than closing the inflation gap.

Step 2. Reasons for the incorrect options

a. This option is incorrect because it cannot be kept as just or equal as unemployment, and inflation faces an inverse trade-off. Therefore, a margin needs to be kept.

c. This is incorrect because unemployment is given more weight than inflation.

b. This is incorrect because if unemployment is given ten times more weight than inflation, it will miserably disturb the economic stability as these two variables are related indirectly. Therefore, a balance needs to be maintained.