5. A. Explain the Taylor rule (be sure to provide the equation). Tell what the Fed would have to do if inflation or GDP were not at the target rates.

B. In some countries, the central bank's only objective is keeping inflation low. What does this imply about the Taylor rule in these countries?

C. Suppose a country is at potential or the natural rate of GDP and consumption and investment fall. Illustrate the effects on GDP and interest rates using an IS-LM model. Ignoring inflation, or assuming it is zero, what would the Taylor rule imply the Fed should do? Explain and illustrate on your IS-LM graph.

D. Suppose a country is at potential or the natural rate of GDP and people lose faith in the banking system and pull their money out to hold it as cash (increasing the currency deposit ratio). Illustrate the effects on GDP and interest rates with an IS-LM model. Ignoring inflation, or assuming it is zero, what would the Taylor rule imply the Fed should do? Explain and illustrate on your IS-LM graph.