Use the following formula for the Taylor rule to determine the target federal funds rate. target federal funds rate = natural rate of interest + current inflation + (inflation gap) +(output gap) where the current rate of inflation is 5 percent, the natural rate of interest is 2 percent, the target rate of inflation is 2 percent, and output is 3 percent above its potential, the target federal funds rate is

Multiple Choice

• 2.5 percent.

• 3.5 percent.

• 6.5 percent.

• 10 percent.