Question: Use the following Taylor rule to calculate what would happen to the real interest rate if inflation increased by 7 percentage points. Target federal funds rate = 2 + Current inflation + 1/2 (Inflation gap) + 1/2(Output gap)
Instructions: Round your answers to one decimal place.
If inflation goes up by 7 percentage points, the target federal funds rate goes up by (BLANK) percentage points ( (BLANK) percentage points due to the direct impact of inflation and another (BLANK) percentage points due to an increase in the inflation gap).
According to the Fisher equation, if the nominal rate increased by (BLANK) percentage points and inflation increased by (BLANK) percentage points, the real interest rate must have increased by (BLANK) percentage points.