Suppose the Federal Reserve is following the Taylor rule, which takes both inflation and business cycles into account when setting the fedeal funds rate. Also suppose that the inflation rate in the economy is equal to 3 percent and the output gap is 5 percent.. Consider the information provided in the scenario: Taylor Rule: In this case the Federal Reserve will set the funds rate to be equal to: 16 percent, or 6.25 percent, or 5.75 percent, or 4.75 percent.