Given the version of the Taylor rule in Equation 14.9: 1 calculate the rate of interest that

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Given the version of the Taylor rule in Equation 14.9:

1 calculate the rate of interest that the central bank should set if the rate of inflation is currently 5 per cent, the inflation target is 2 per cent and output is estimated to be two percentage points below capacity;

2 if this succeeds in bringing inflation down to 4 per cent next year, what rate should the central bank set, assuming other conditions are unchanged?

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