Plutonia Uses the Taylor Rule to Set the Short-Term Interest

Essay

Plutonia uses the Taylor rule to set the short-term interest rate at which banks lend to one another.Compute the short-term interest rate that should be set in Plutonia if the inflation target is 2 percent,the long-term target for the interest rate is 3 percent,the current rate of inflation is 5 percent,and output is 5 percent below its trend.