4. Suppose the current price level is 149.2 and one year ago the price level was 147.3. Output is currently 12,892.5 and potential output is 13,534.2 (both in billions of 2005 dollars).

a. What value of the Federal funds rate would the Fed choose if it follows the Taylor rule given by Eq. (14.6)?

b. Suppose that one year later, the price level has declined by 0.4°/o, output has declined by 1.3°/o, and potential output has increased 3°/o. In this new situation, what value of the Federal funds rate would the Fed choose if it follows the Taylor rule? What is the problem with setting the Federal funds rate to follow the Taylor rule in this case?