Consider the Following Rule for Monetary Policy: R = 2

Consider the following rule for monetary policy: r = 2 percent +  + 1/2(y - y*) /y* + 1/2(- *) , where r is the nominal interest rate, y is real GDP, y* is an estimate of the natural rate of output, π is the inflation rate, and π* is the inflation target. Which of the following statements is not correct?

A) If aggregate demand shifts right from long-run equilibrium, this rule unambiguously implies that the Fed increases the nominal interest rate.
B) If aggregate supply shifts right from long-run equilibrium at the inflation target, we cannot tell without more information whether the Fed should increase or decrease the nominal interest rate.
C) If output is at its natural level, but inflation is above its target, the Fed must increase the nominal interest rate.
D) If inflation is at its targeted level, but output is above its natural rate, the Fed must decrease the federal funds rate.

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