In implementing monetary policy with respect to the Taylor Rule:
A)the central bank is willing to tolerate a 2 percent target rate of inflation, and that the central bank should follow three rules when setting its target for the overnight lending rate.
B)the central bank is willing to tolerate a 5 percent target rate of inflation, and that the central bank should follow three rules when setting its target for the overnight lending rate.
C)the central bank is willing to tolerate any inflation rate, and overnight lending rate.
D)the central bank chooses an inflation target regardless of the economic situation.

Question

Quizplus · Accepted Answer

The Taylor Rule recommends that the central bank should aim for an inflation rate of 2 percent and follow three rules when setting its target for the overnight lending rate. This approach ensures that the central bank takes into account both inflation and output in setting monetary policy. A higher inflation target could lead to higher inflation expectations and undermine the credibility of the central bank's commitment to price stability. Furthermore, a more discretionary approach to setting the overnight lending rate could lead to greater uncertainty and volatility in the economy.

In Implementing Monetary Policy with Respect to the Taylor Rule