For example, persistently low inflation can further reduce inflation expectations – leading to even lower actual inflation in the future. At an extreme, a falling general level of prices can significantly hinder economic activity as people delay their spending in the belief that things 7 See Principles for Monetary Policy  8  will forever be cheaper in the future.
12 Rules of the general sort proposed by Taylor (1993) capture well our statutory mandate to promote maximum employment and price stability by prescribing that the federal funds rate should respond to the deviation of inflation from its longer-run goal and to the output gap, given that the economy should be at or close to full employment when the output gap – the difference between actual GDP and an estimate of potential output – is closed.