Assume that the equilibrium real federal funds rate is 2% and the target for inflation is 1.0%. Suppose that the inflation rate is at 5.0%, leading to an inflation gap of 4.0% (equal to 5.0%1.0%), and real GDP is 2.0% above its potential, resulting in a positive output gap of 2.0%. The Taylor rule suggests that the federal funds rate should be set at:

A.

8.00%.

B.

12.00%.

C.

10.00%.

D.

6.00%.