The Taylor rule specifies how policymakers should set the federal funds rate target. Suppose that U.S. real GDP falls 1% below potential GDP, all else constant. According to the Taylor rule, the Fed should
a) raise or
b) lower
the federal funds rate target by:
a) 0.75%,
b) 0.25%,
c) 0.5%, or
d) 1%.
Suppose instead that the U.S. inflation rate falls by 1%, all else constant. According to the Taylor rule, the Fed should
a) lower or
b) raise
the federal funds rate target by:
a) 2.25%,
b) 1.75%,
c) 1.5%, or
d) 2%.