Question: This exercise asks you to apply the Taylor rule. Suppose inflation is 3 percent and the output gap is zero. According to the Taylor rule,

This exercise asks you to apply the Taylor rule. Suppose inflation is 3 percent and the output gap is zero. According to the Taylor rule, at what value should the Fed set the real interest rate? The nominal interest rate?

Suppose the Fed were to receive new information showing that there is a 1 percent recessionary gap (inflation is still 3 percent). According to the Taylor rule, how should the Fed change the real interest rate, if at all?

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