Final answer:
The inflation gap is 0.3%, calculated by subtracting the Fed's target inflation rate (1.7%) from the current inflation rate (2.0%). This reflects the Federal Reserve's targeted monetary policies to maintain inflation within certain limits.
Step-by-step explanation:
To find the inflation gap, we must subtract the Fed's target inflation rate from the current inflation rate. The current inflation rate is 2.0% and the Fed's target inflation rate is 1.7%. Thus, the inflation gap is calculated as follows: 2.0% - 1.7% = 0.3%. Therefore, the inflation gap should be 0.3% (rounded to one decimal place).
From historical episodes of monetary policy, we can see the Federal Reserve's response to various economic conditions and its influence on inflation rates and federal funds interest rates. The Fed's actions reflect its commitment to maintaining inflation within certain limits, with the general tendency being to raise rates to combat high inflation and lower them to stimulate growth during slow economic periods or anticipated downturns. The determination of the Fed to avoid returning to the high inflation rates of the 1970s is clear from these examples.