A monetary policy reaction curve requires the central bank to have a(n):
A) money growth target.
B) inflation target.
C) unemployment target.
D) economic growth target.

Question

Quizplus · Accepted Answer

A monetary policy reaction curve shows the trade-off between inflation and unemployment, and to construct it, the central bank needs an inflation target. The central bank adjusts its monetary policy according to where it wants the economy to be on the reaction curve, which means it needs a target for one of the variables in the trade-off. While economic growth and unemployment are important considerations for the central bank, they are not typically the primary focus in constructing a reaction curve. Money growth would also not be directly related to the trade-off between inflation and unemployment.

A Monetary Policy Reaction Curve Requires the Central Bank to Have