Question: please answer the following: 2. Suppose that GDP is thought to be 2 percent above potential (that is, the output gap is 2 percent) and

please answer the following:

2. Suppose that GDP is thought to be 2 percent above potential (that is, the output gap is 2 percent) and potential output grows 4 percent per year. Suppose that the inflation rate has been 2 percent over the past year. The federal funds rate is currently 3 percent. The equilibrium real federal funds rate is 3 percent, and Fed's inflation target is 1 percent. a. According to the standard Taylor rule presented in class, is the federal funds rate currently too high or too low? By how much? Show your work. b. Suppose that a year has gone by. GDP is nowjust 1 percent above potential, and the inflation rate was 1.5 percent over the year. According to the Taylor rule, what federal funds rate should the Fed now set (assuming that the ination target does not change)

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