Supposing that the Fed follows the Taylor rule (The Economic Naturalist 19.6), find the real interest rate and the nominal interest rate that the Fed will set in each of the following situations: (LO5)

a. Inflation of 4 percent and an expansionary gap equal to 1 percent of potential output.

b. Inflation of 2 percent and a recessionary gap equal to 2 percent of potential output.

c. Inflation of 6 percent and no output gap.

d. Inflation of 2 percent and a recessionary gap of 5 percent. (Can the Fed set a negative real interest rate? If so, how?)