1. You are analyzing the returns of an investment fund over the last 2 years. Returns and inflation during that time are listed below in the table. What was the real return during year 2? Answer in percentage points to the nearest 4th decimal.

Return Inflation

Year 1 7.20% 3.90%

Year 2 2.10%. 4.20%

2. You are preparing a research report analyzing what a Taylor Rule implies for the target rate that the Federal Reserve should have. Suppose that inflation is currently at the target goal (2.0%) and real GDP is at its potential output level. How much would the Taylor Rule suggest the target rate should be changed if inflation were to suddenly increase by 1.0 percentage points to 3.0%? Answer in percentage points. Refer to slide 10 in the "Interest Rates and Econ" presentation file.