Central bankers with a relatively steep monetary policy reaction curve will:
A) move interest rates more aggressively when inflation rises, leading to more volatility in output.
B) move interest rates more aggressively when inflation rises, leading to less volatility in output.
C) move interest rates less aggressively when inflation rises, leading to more volatility in output.
D) move interest rates less aggressively when inflation rises, leading to less volatility in output.

Question

Quizplus · Accepted Answer

Central bankers with a steep monetary policy reaction curve are more likely to move interest rates aggressively when inflation rises. This can lead to more volatility in output as businesses and households may react more strongly to sudden changes in interest rates. The more aggressive policy response is aimed at quickly reducing inflationary pressures, but it can have unintended consequences for economic activity.

Central Bankers with a Relatively Steep Monetary Policy Reaction Curve