Question

The new chairman of the Ionian Central Bank (ICB) is preparing for her first board meeting. She is expected to recommend a monetary policy for the board to pursue. She decides to use the Taylor rule, which was originally developed for the U.S. Federal Reserve. Ionia's potential GDP is 100 million drachma, but current GDP is 96 million . What is Ionia's output gap

Answer 1

By using the Taylor rule used the U.S. Federal Reserve, the Output gap for Ionian Central Bank will equal -4%.

Output gap helps to measure the difference between the actual output of an economy and its potential output.

• The formula to use to derive Ionia's Output gap is {[Current GDP - Potential GDP} / 100}}

Ionia's Output gap = (96 - 100)/100

Ionia's Output gap = -4 / 100

Ionia's Output gap = -4%

Therefore, by using the Taylor rule used the U.S. Federal Reserve, the Output gap for Ionian Central Bank will equal -4%.

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