Suppose That the Inflation Rate Is 3 Percent and the Output

Multiple Choice

Suppose that the inflation rate is 3 percent and the output gap is -1 percent. Assuming that the equilibrium real interest rate is 2 percent, what target should the Fed set for the federal funds rate, if the Taylor rule is used?

A) 5 percent
B) 6 percent
C) 4 percent
D) 1 percent