"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 % )
= 1.5 %
Given the current federal funds rate should the Federal Reserve engage in expansionary or contractionary monetary policy?"