Use a graph to show the differences in the central bank reaction function if the Bank of Canada is more tolerant or less tolerant of deviations from inflation in the short run.

Question

Quizplus · Accepted Answer

The Answer is If the central bank reaction function is relatively flat,as is represented by Central bank reaction function₁,the Bank of Canada is more tolerant of deviations from inflation in the short run,and therefore will change the interest rate by a smaller amount in response to the deviation between the current inflation rate and the target inflation rate.
If the central bank reaction function is relatively steep,as is represented by Central bank reaction function₂,the Bank of Canada is less tolerant of deviations from inflation in the short run,and therefore will change the interest rate by a larger amount in response to the deviation between the current inflation rate and the target inflation rate.

If the central bank reaction function is relatively flat,as is represented by Central bank reaction function₁,the Bank of Canada is more tolerant of deviations from inflation in the short run,and therefore will change the interest rate by a smaller amount in response to the deviation between the current inflation rate and the target inflation rate. If the central bank reaction function is relatively steep,as is represented by Central bank reaction function₂,the Bank of Canada is less tolerant of deviations from inflation in the short run,and therefore will change the interest rate by a larger amount in response to the deviation between the current inflation rate and the target inflation rate.

Use a Graph to Show the Differences in the Central