4. Supposing that the Reserve Bank follows the Taylor rule. Page 265 Find the real interest rate and the nominal interest rate that the Reserve Bank will set in each of the following situations:

a)Inflation of 4 per cent and an expansionary gap equal to 1 per cent of potential output. b)Inflation of 2 per cent and a recessionary gap equal to 2 per cent of potential output. c)Inflation of 6 per cent and no output gap. d)Inflation of 2 per cent and a recessionary gap of 5 per cent. (Can the Reserve Bank set a negative real interest rate? If so, how?) LO 10.6 MEDIUM