According to the general MP rule of the IS-MP-PC model, a 1% increase in both the current inflation rate and the inflation target of the central bank will cause the central bank to:
A)raise the nominal interest rate by 1%.
B)raise the real interest rate by 1%.
C)keep the nominal interest rate constant.
D)none of the above.

Question

Quizplus · Accepted Answer

According to the MP rule, the central bank will raise the nominal interest rate by a percentage equal to the sum of the current inflation rate and the difference between the inflation target and the current inflation rate. Therefore, in this case, a 1% increase in both the current inflation rate and the inflation target will cause the central bank to raise the nominal interest rate by 1%.

According to the General MP Rule of the IS-MP-PC Model