If the central bank did not follow the Taylor principle ________.
A) inflation would spiral out of control
B) it could rely on autonomous monetary policy changes
C) it could rely on non-conventional monetary policy tools
D) both B and C

Question

Quizplus · Accepted Answer

The Taylor principle posits that the central bank should raise nominal interest rates by more than the increase in inflation to prevent inflation from spiraling out of control. Therefore, if the central bank does not follow the Taylor principle, inflation could indeed spiral out of control. Options B and C are not a direct consequence of not following the Taylor principle.

If the Central Bank Did Not Follow the Taylor Principle