i. Use the Taylor rule to determine the appropriate setting of the overnight interest rate if the current inflation is 1%, equilibrium overnight interest rate is 2%, target inflation is 2% and there is a recessionary output gap of 2%.

ii. Now assume the Taylor Rules gives a weight of to Inflationary gap thereby mandating a hierarchal goal of price stability (weight of output gap would be now). Using the Taylor rule determine the appropriate setting of the overnight interest rate if the current inflation is 1%, equilibrium overnight interest rate is 2%, target inflation is 2% and there is a recessionary output gap of 2%.

iii. Using the standard Taylor rule with coefficient of inflation gap at 0.5, explain how should Bank of Canada change the target for overnight interest rate if economy sees potential real GDP growing at a pace slower than the current GDP.