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Based on the Taylor Rule use the following information to calculate the target federal funds rate. Variable Value Target inflation rate 2 percent Current inflation rate 4 percent Real equilibrium federal funds rate 2 percent Output gap 8 percent In this​ case, the Federal funds target rate​ is: nothing percent. ​(Round your solution to one decimal​ place.)

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Answer:

Target  funds rate = 7.5%

Explanation:

The  target Federal funds rate is calculated as:

Target  funds rate = Real equilibrium Federal funds rate + current inflation + 0.5(inflation gap) + 0.5(output gap).

(Inflation gap = Current inflation rate - Target inflation rate)

So,  Target  funds rate  = 2 + 1 + 0.5(1 - 2) +0.5(10)

                                        = 3 + 0.5(-1) + 5

                                        = 3 - 0.5 + 5

                                        = 7.5

Therefore, Target  funds rate = 7.5%

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