Using the taylor rule, if inflation is 1 percent, desired inflation is 2 percent, and output is 2 percentage points below potential, the fed should target a federal funds rate of:

1.5%

Step-by-step explanation:

According to the Taylor rule, the federal funds rate targeted by the Fed is:

Where AI is the actual inflation (1%), DI is the desired inflation (2%) and PD is the deviation from potential (2%):

The Fed should target a federal funds rate of 1.5%.

according to this law, when unemployment goes up by 1%, gdp drops by 2%. in the question, unemployment rate goes from 2% to 5%, meaning unemployment goes up by 3%, so the gdp drops by 6%. thus the effect is a drop in gdp by 6%.

step-by-step explanation: