According to the Taylor rule, what is the federal funds target rate under the following conditions?

-Equilibrium real federal funds rate equals 4%

-Target rate of inflation equals 4%

-Current inflation rate equals 3%

Real GDP is 1% below potantial real GDP

The federal funds target rate equals _% (rounded answer to two decial places.)

6%

Explanation:

According to the Taylor rule,

it = pt + rt * + 0.5 (pt - pt*) + 0.5 (yt - yt')

where it = target rate = (To be found out in the question)

pt = rate of inflation ( = 3%), rt * = real Fed funds rate ( = 4%)

pt * = target inflation ( = 4%)

yt - yt' = difference between real GDP and potential GDP ( = - 1%)

Therefore, it = 3 + 4 + 0.5 (3% - 4%) + 0.5 (-1%)

= 6%