1. "Because inflation targeting focuses on achieving the inflation target, it will lead to excessive output fluctuations." Is this statement true, false, or uncertain? Explain.

2. Why might inflation targeting increase support for the independence of the central bank in conducting monetary policy?

3. What does the Taylor rule imply that policymakers should do to the fed funds rate under the following scenarios?

(a.) Unemployment rises due to a recession.

(b.) An oil price shock causes the inflation rate to rise by 1% and output to fall by 1%.

(c.) The economy experiences prolonged increases in productivity growth while actual output growth is unchanged.

(d.) Potential output declines while actual output remains unchanged.

(e.) The Central Bank revises its (implicit) inflation target downward.