"Suppose we have the following situation in the economy:
Current Inflation: 6%
Target Inflation: 3%
Deviation from Potential Output: (+) 2% above potential output
Current Fed Funds Rate: 1%
Appropriate Federal Funds Rate According to Taylor Rule:
F e d F u n d s R a t e = 2 % + 6 % + 0.5 ( 6 % − 3 % ) + 0.5 ( + 2 % )
= 2 % + 6 % + ( 1.5 % ) + ( + 1 % )
= 10.5 %
Given the current federal funds rate should the Federal Reserve engage in expansionary or contractionary monetary policy?"