Suppose the federal funds rate is 6 percent. If the output gap increases by 2 percentage points and the weight on output gap is 0.6, by how much should the federal funds rate increase according to the Taylor rule if all other variables remain unchanged??
A. It should increase by 0.4 percentage points.
B. It should increase by 0.6 percentage points.
C. It should increase by 2 percentage points.
D. It should increase by 1.2 percentage points.
Answer: D
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