Consider the Following Rule for Monetary Policy: R = 2 $\pi$

Consider the following rule for monetary policy: r = 2 percent + $\pi$ + 1/2(y - y*) /y* + 1/2( $\pi$ - $\pi$ *) , where r is the nominal interest rate, y is real GDP, y* is an estimate of the natural rate of output, $\pi$ is the inflation rate, and $\pi$ * is the inflation target. What is the implication of this rule?

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

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