According to the Taylor principle, for inflation to be stable, the central bank must respond to an increase in inflation with ____ increase in the nominal interest rate.
A) no
B) an equal
C) a greater
D) a smaller

Question

Quizplus · Accepted Answer

The Taylor principle states that for inflation to be stable, the central bank must respond to an increase in inflation with a greater increase in the nominal interest rate. This means that if inflation increases by 1%, the central bank should increase the nominal interest rate by more than 1% to prevent further inflationary pressure. This helps anchor inflation expectations and prevent a spiral of rising inflation.

According to the Taylor Principle, for Inflation to Be Stable