Since monetary policy changes made through the fed funds rate occur with a lag, policymakers are usually more concerned with adjusting policy according to changes in the forecasted or the expected inflation rate, rather than the current inflation rate. In light of this, suppose that monetary policymakers employ the Taylor rule to set the fed funds rate, where the inflation gap is defined as the difference between expected inflation and the target inflation rate. Assume that the weights on both the inflation and output gaps are 12, the equilibrium real fed funds rate is 2%, the inflation rate target is 2%, and the output gap is 4%.

If the expected inflation rate is 3%, then at what target should the fed funds rate be set according to the Taylor rule?

1. 3.5
2. 7.5
3. 10
4. 2