Figure 19.8: FIGURE 19-8 Tracking Monetary Policy Using the Output Gap and Inflation

Figure 19.8: Panel (a) shows that the federal funds rate usually rises when the output gap is positive—that is, when actual real GDP is above potential output—and falls when the output gap is negative. Panel (b) illustrates that the federal funds rate tends to be high when inflation is high and low when inflation is low.

Data from: Federal Reserve Bank of St. Louis.