Suppose the economy is thought to be 1 percent below its potential output (i.e., the output gap is 1 percent). The potential output is growing at 4% a year. Suppose the Fed is following the Taylor rule, with an inflation rate of 4 percent over the past year. The equilibrium real fed funds rate is 3 percent, the weight on the output gap is 0.75 and the weigh on the inflation gap is 0.25. The inflation target is 1 percent. What should the federal funds rate be?

a. 7 percent
b.		8 percent
c.		9 percent
d.		. 10 percen