An increase in the interest rate due to Taylor principle changes result in ________.
A) a movement up the monetary policy curve
B) a movement down the monetary policy curve
C) an upward shift of the monetary policy curve
D) a downward shift of the monetary policy curve

Question

Quizplus · Accepted Answer

A higher interest rate due to the Taylor principle implies a tighter monetary policy stance. This means that the central bank is trying to slow down the economy and reduce inflationary pressures. As a result, the demand for credit and spending in the economy decline, which shifts the economy downward along the aggregate demand curve. This causes a downward pressure on prices and inflation, which moves the economy closer to its long-run equilibrium. This implies a movement up the monetary policy curve as the central bank raises interest rates to achieve its policy objectives.

An Increase in the Interest Rate Due to Taylor Principle