The Taylor rule sets interest rates according to the notion that the short-term real interest rate should reflect a mark-up or mark-down on the real natural interest rate. The add or subtract factors are determined by weights on the inflation and output gaps, respectively. Typically the output gap is calculated based on estimates of a natural rate of unemployment with determines the potential output level. If the natural rate of unemployment is above the true full employment level of unemployment, then the Taylor rule will always lead to deflationary monetary policy settings even when the central bank considers it is conducting a neutral policy stance.
Answer: True
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