If the central bank did not follow the Taylor principle,an increase in inflation would lead to ________.
A)a decrease in the nominal interest rate
B)an increase in inflation
C)a decrease in aggregate expenditure
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

According to the Taylor principle, if inflation increases, the central bank should increase the nominal interest rate by at least the same amount to help reduce inflationary pressures. However, if the central bank does not follow the Taylor principle, an increase in inflation would not necessarily lead to a corresponding increase in the nominal interest rate. This could lead to further inflationary pressures, which would cause continued increases in inflation. Therefore, the correct answer is B, an increase in inflation. The other choices are not necessarily true if the central bank does not follow the Taylor principle.

If the Central Bank Did Not Follow the Taylor Principle,an