The Taylor Principle differs from the Taylor rule because ________.
A) it does not provide a rule for how monetary policy should react to conditions in the economy
B) the Taylor principle relates to real interest rates and the Taylor rule pertains to nominal interest rates
C) the Taylor principle is exclusively used by the Bank of Canada while the Taylor rule is used by the U.S. Fed
D) the Taylor rule relates to inflation rates while the Taylor principle is applied to real interest rates

Question

Quizplus · Accepted Answer

The Taylor Principle is a concept within the broader Taylor Rule framework. It specifically states that central banks should adjust nominal interest rates by more than one-for-one in response to inflation to stabilize the economy. This principle does not provide a specific rule or formula for policy action; instead, it offers guidance on the direction and magnitude of interest rate adjustments in response to inflation. The Taylor Rule, on the other hand, is a more comprehensive guideline that suggests how central banks should set short-term interest rates based on deviations of actual inflation rates from target inflation rates and actual GDP from potential GDP.

The Taylor Principle Differs from the Taylor Rule Because ________