If a central bank engages in inflation targeting, then
A)it will not change interest rates in response to output fluctuations
B)it will change interest rates aggressively as soon as inflation or output changes
C)it will lower interest rates aggressively as soon as inflation heats up
D)it will increase interest rates aggressively as soon as aggregate supply increases
E)none of the above

Question

Quizplus · Accepted Answer

Inflation targeting means that the central bank focuses on keeping inflation at a specific target level. If inflation is above the target, the central bank will raise interest rates to slow down economic growth and reduce inflation. If inflation is below the target, the central bank will lower interest rates to stimulate economic growth and increase inflation. Therefore, the correct answer is A.

If a Central Bank Engages in Inflation Targeting, Then