A central bank that does NOT follow the Taylor principle will fail to raise nominal interest rates by more than the increase in expected inflation. As a result,the monetary policy curve is ________ sloping and the aggregate demand curve is ________ sloping.
A)upward;downward
B)downward;downward
C)upward;upward
D)downward;upward

Question

Quizplus · Accepted Answer

According to the Taylor principle, when inflation is expected to rise, a central bank should raise nominal interest rates by more than the increase in expected inflation. If a central bank fails to follow this principle, the monetary policy curve will be downward sloping (indicating that higher inflation expectations lead to lower interest rates) and the aggregate demand curve will be upward sloping (because lower interest rates will stimulate borrowing and spending, leading to higher aggregate demand). Therefore, option D (downward sloping; upward sloping) is the correct choice.

A Central Bank That Does NOT Follow the Taylor Principle