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.)

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%