The point where the central bank's target inflation rate is consistent with the long-run real interest rate lies:
A) above the monetary policy reaction curve.
B) below the monetary policy reaction curve.
C) on the monetary policy reaction curve.
D) on the horizontal (inflation) axis.

Question

Quizplus · Accepted Answer

The monetary policy reaction curve represents the trade-off between inflation and unemployment, and shows the combinations of inflation and unemployment that the central bank is willing to tolerate for a given level of the real interest rate. The point where the central bank's target inflation rate is consistent with the long-run real interest rate is where the monetary policy reaction curve intersects with the horizontal (inflation) axis, which represents the level of inflation. Therefore, the answer is C, on the monetary policy reaction curve.

The Point Where the Central Bank's Target Inflation Rate Is