Explain what we mean by the Federal Reserve's reaction function.

a) What are two main aspects of the economy that the Fed responds to, and has to balance?

b) What is the Fed's general policy target? List 3 (or more) practical tools through which the Fed can influence its target.

c) How does the Fed adjust its target in response to the factors you listed at (a), and why? (Focus on signs, not magnitudes)

Note: you can use the Taylor rule if you remember it, but still need to explain its components and signs.