Use the following Taylor rule to calculate what would happen to the real interest rate if inflation increased by 5 percentage points.

Target federal funds rate = Natural rate of interest+ Current inflation + 1/2(Inflation gap) + 1/2(Output gap)

Instructions:Enter your responses rounded to one decimal place.

If inflation goes up by 5 percentage points, the target (nominal) federal funds rate goes up bypercentage points (percentage points due to the direct impact of inflation and anotherpercentage points due to an increase in the inflation gap).

According to the Fisher equation, if the nominal rate increased bypercentage points and inflation increased bypercentage points, the real interest rate must have increased bypercentage points.