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. Therefore,higher inflation will lead to a ________ in real interest rates,resulting in ________-sloping monetary policy curves.
A)decline;downward
B)rise;downward
C)rise;upward
D)decline;upward

Question

Quizplus · Accepted Answer

The Taylor principle suggests that central banks should raise nominal interest rates by more than the increase in expected inflation to stabilize the economy. Not following this principle means that real interest rates will decline (since nominal rates don't increase enough to offset inflation), leading to a downward-sloping monetary policy curve as lower real rates are associated with more stimulative monetary policy.

A Central Bank That Does NOT Follow the Taylor Principle