Current inflation rate is below the target inflation rate

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Use the Taylor rule to calculate the target for the federal funds rate for October 2012, using the following information: equilibrium real federal funds rate of 2%, target inflation rate of 2%, current inflation rate of 1.2%, and an output gap of 5.9%. In your calculations, the inflation gap is negative if the current inflation rate is below the target inflation rate. How does the targeted federal funds rate calculated using the Taylor rule compare to the actual federal funds rate of 0% to 0.25% at the time? Briefly explain.

Reference no: EM131193621

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