"Suppose we have the following situation in the economy:
Current Inflation: 1%
Target Inflation: 2%
Deviation from Potential Output: (-) 2% below potential output
Current Fed Funds Rate: 3%

Appropriate Federal Funds Rate According to Taylor Rule:
F e d F u n d s R a t e = 2 % + 1 % + 0.5 ( 1 % − 2 % ) + 0.5 ( − 2 % )
= 2 % + 1 % + ( − 0.5 % ) + ( − 1 % )
Is the economy above or below potential output ? Given your answer concerning the current state of outptut, when calculating the appropriate Fed Funds Rate what is the Taylor Rule stating should be done in regards to the calculation of the appropriate federal funds rate?"
1) Increase the federal funds rate
2) Decrease the federal funds rate
3) Keep the federal funds rate unchanged
4) Cannot be determined