a) According to Taylor’s monetary policy rule, at what rate should the Bank of Canada set the overnight rate if the natural interest rate is 0.8 percent, actual equals target inflation of 2.3 percent, output is at its potential level, and α and β are each equal to 0.5? Assume the natural interest rate is 2%, and alfa and beta are each equal 0.5.

b) Suppose instead that actual inflation is on target, but output rises 2 percent above potential output. By how much and to what level should the Bank increase the overnight rate relative to your initial calculation?