When a central bank engages in inflation targeting, then
A)interest rate stability will automatically result
B)interest rates need to be raised as soon as the output gap starts to shrink
C)the Taylor rule can still be used as a guide as long as the output coefficient is set to zero
D)the Taylor rule can still be used as a guide as long as the output coefficient has a lot of weight
E)none of the above

Question

Quizplus · Accepted Answer

Inflation targeting means that the central bank's primary goal is to maintain low inflation. The Taylor rule, which provides guidance on setting interest rates based on inflation and other economic indicators, can still be used as a guide. However, the output coefficient, which reflects the level of economic activity or output, would need to be set to zero since inflation targeting does not prioritize output stabilization.

When a Central Bank Engages in Inflation Targeting, Then