Alright. Let's try this example for the Taylor rule. Use the Taylor rule to estimate the target federal funds rate. The current inflation rate in the economy is 4% and the equilibrium real federal funds rate is 2%. The target inflation is 2%. Real GDP is currently above potential GDP by 1%. There are a lot of numbers there, but it's just asking if you can apply this formula. So, the target federal funds rate is calculated as follows: the target federal funds rate is equal to the current inflation plus the equilibrium real federal funds rate, which they have also given to us. They have given us all these numbers, plus half of the inflation gap. I'll put IG plus half of the output gap, OG, as well. Okay? So they have given us information about all these numbers. We just have to figure out what they are and put them in the correct place. They told us the current inflation rate is 4%, right? 4% for the current inflation rate plus the equilibrium real federal funds rate is 2%. So, they have given us these numbers already. Now, we need to think about the inflation gap and the output gap. So, remember, the inflation gap is equal to the current inflation minus the target inflation, which we have information about both. They told us the current inflation is 4%, and the target inflation right here is given to us as 2%. So our inflation gap is equal to 2% right there. 2% is going to be our inflation gap. So over here, we'll have 0.5 times 2% for our inflation gap. And finally, we need our output gap and they told us straightforwardly. They told us that the output, real GDP, is currently above potential GDP by 1%. So if real GDP is above potential GDP, our output gap, remember, our output gap is current minus potential. So, right now, they told us that the current is above potential by 1%. So the output gap is equal to that 1% that we are above potential. They didn't tell us both numbers in that case; they just told us what the difference is, the 1%. So, this would be 0.5 times the output gap of 1%, and we just have to wrap this up here. So the target federal funds rate is going to equal, I'll do it over here, 4% plus 2% plus 0.5 times 2% plus 0.5 times 1%, this comes out to 7.5% as the target federal funds rate in this example.

So, what's happening here is we've got high inflation and our economy is hot, we're producing past our potential GDP, so they want to set a high interest rate to de-incentivize investment and de-incentivize aggregate demand and bring that spending down to a more reasonable level. 7.5% would be the rate approximate for the target federal funds rate.