Which of the following is true about the Taylor principle?
A)it explains the link between higher inflation and higher real interest rates
B)it is the foundation for an upward sloping MP curve
C)it reflects the practice of monetary policy
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

The Taylor principle is a concept in monetary economics that explains how central banks should adjust nominal interest rates in response to changes in inflation to stabilize the economy. It suggests that when inflation rises, central banks should increase nominal interest rates by more than the increase in inflation to ensure real interest rates rise, thereby cooling the economy. This principle underlies the upward sloping monetary policy (MP) curve, reflecting the practice of monetary policy where central banks adjust interest rates in response to changes in inflation to maintain economic stability.

Which of the Following Is True About the Taylor Principle