Use the following Taylor rule to calculate what would happen to the real interest rate if inflation Increased by 2 percentage points. Target federal funds rate Natural rate of interest Current Inflation 1 1/2(Inflation gap) 1/2(Output gap) Instructions: Enter your responses rounded to one decimal place. percentage points ( If inflation goes up by 2 percentage points, the target (nominal) federal funds rate goes up by percentage points due to the direct impact of inflation and another 15 percentage points due to an increase in the inflation gap). Consider the Fisher equation. Given the increase in the nominal interest rate you just calculated and the 2 percentage point increase In inflation we started with, the real Interest rate must have increased by percentage points.

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