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 : 10 percent

Real equilibrium federal funds rate : 2 percent

Output gap: 8 percent

Question: In this case, the Federal funds target rate is: (Round your solution to one decimal place.)

Based on the Taylor Rule, the formula for calculating the Federal target rate is:

Federal funds rate target = equilibrium real federal funds rate + inflation rate + 1/2 (output gap) + 1/2 (inflation gap)

We are given that:

equilibrium real federal funds rate = 2%

inflation rate = 10%

output gap = 8%

inflation gap = 10% - 2% = 8%

Substituting to the equation:

Federal funds rate target = 2% + 10% + 0.5*8% + 0.5*8%

Federal funds rate target = 20%