Given the effect of short-term interest rates on consumer credit, Li’s team decides to determine what the short-term interest rate is expected to be in the future. The central bank’s last official statement identified 2.5% as the appropriate rate, assuming no other factors. Li’s team then estimates potential factors that may make the central bank behave differently from the 2.5% rate in the statement, shown in Exhibit 1.
| GDP growth forecast | 2.00% |
|---|---|
| GDP growth trend | 1.00% |
| Inflation forecast | 1.50% |
| Inflation target | 3.50% |
| Earnings growth forecast | 4.00% |
| Earnings growth trend | 2.00% |
Based on how the Taylor rule is applied by Li’s team, the central bank’s estimated optimal short-term rate is closest to:
- 2.8%.
- 1.5%.
- 2.0%.
The answer was C. I thought it was B. But its not clear to me what the optimal short term rate is