Question

The Taylor rule shows combinations of (i) ____ and (ii) ____ which characterize (iii) _____ of the central bank. Select one: a. (i) output; (ii) interest rates; (iii) the monetary policy b. (i) inflation; (ii) interest rates; (iii) inflation targeting c. (i) interest rates; (ii) the real money stock; (iii) monetary targeting d. (i) inflation; (ii) output; (iii) the interest rate policy

Answer 1

The Taylor rule shows combinations of inflation and interest rates which characterize the monetary policy of the central bank. It helps central banks determine the appropriate level of interest rates based on inflation and output gaps.

Step-by-step explanation:

The Taylor rule shows combinations of (i) inflation and (ii) interest rates which characterize (iii) the monetary policy of the central bank.

Therefore, the correct answer is b. (i) inflation; (ii) interest rates; (iii) inflation targeting.

The Taylor rule is a formula used by central banks to determine the appropriate level of interest rates based on the current inflation rate and the gap between actual output and potential output.

For example, if the inflation rate is above the target level, the central bank may increase interest rates to reduce inflation. Conversely, if the inflation rate is below the target level, the central bank may lower interest rates to stimulate economic growth.