Now let's discuss a calculation used when studying monetary policy. It's called the Taylor rule. So the Taylor rule, I want to make a note real quick. This is something you generally deal with more in higher-level economic classes, but sometimes they like to mention it here and a lot of times it's just knowing what it is. You might not even have to do these calculations, so I would suggest double-checking with your professor. But let's go through it just in case you need to know it. The Taylor rule links the Federal target the Fed's target for the Federal Funds Rate to several economic variables. Okay? So we're thinking about what is the Federal Funds Rate that the Fed wants to set and this goes back to that money market, right? What is that equilibrium interest rate that the Fed wants? So remember that the federal fund rate is the interest rate banks give to other banks on overnight loans. So this is generally when they need to meet reserve requirements. They need a certain amount of reserves for their level of deposits and they get a short-term loan just to meet these requirements. And those loans are given at this interest rate, the federal funds rate. So the Fed is regularly making decisions to get to the correct, in quotations, Federal Funds Rate, right? They want to set the Federal Funds Rate where they think is best for the economy. Now, I want to make a note about the Taylor rule is that the Fed does not use the Taylor rule. This is an approximation that this smart dude, John Taylor made. He made this mathematical approximation of how the Fed sets their target funds rate the target federal funds rate. Okay? So let's get into the calculation now. So the target Federal Funds Rate is going to be composed of these variables here. First, it's the current inflation rate. What is the inflation rate currently in the economy? Plus the equilibrium real federal funds rate. So this is also going to be basically the equilibrium real federal funds rate is adjusted for inflation. So the current inflation rate is equal to actual inflation and here we've got equilibrium real. And this is generally given to you in the problems. It's going to have to be given and it's generally set as 2% is the target that the Fed has for this number. So equilibrium real federal funds rate and notice, this might look complicated but they're going to have to give you all of this information in the problem. There's really not so much math that goes on. So the sum of the first two terms is where the federal funds rate would be at long-run equilibrium. That's where they want it to be, and it's generally 4%. They generally target for 2% in inflation and 2% in equilibrium there as well. Now, the last two terms make it look a little complicated, but it's not that bad. The inflation gap, it's the difference between the current inflation and the target and the Fed usually sets the target at 2%. The target is generally 2% for inflation. So the inflation gap equals current inflation minus target. So you can get a negative number here. You can get a negative current minus target for the inflation gap and you can also get a negative number for the output gap as well. So the output gap deals with GDP. So we've got the inflation gap and then the output gap which is the difference. It equals the current GDP minus the potential GDP. The potential GDP of the economy, right? What is the total GDP that they could have?