If a central bank targets inflation, then
A)it should not react to every disturbance in aggregate demand
B)its policy implies an automatic tradeoff between inflation and unemployment
C)it can reduce unemployment without fear of losing credibility
D)interest rates have to be lowered whenever there is a disturbance in the expenditure sector
E)none of the above

Question

Quizplus · Accepted Answer

If a central bank targets inflation, it focuses on keeping inflation within a certain range, and therefore should not react to every disturbance in aggregate demand as it may cause fluctuations in inflation levels. Instead, it should adopt a more long-term approach to manage inflation.

If a Central Bank Targets Inflation, Then