Suppose the nominal interest rate is five percent, and the inflation rate rises from two percent to three percent
Might an increase in the nominal interest rate to 5.5 percent be consistent with the Taylor Principle? If not, what consequences might ensue?
Yes, it might be. The Taylor Principle requires that the nominal interest rate rise by more than the increase in expected inflation. If expected inflation has not changed, or has increased by less than half a percentage point, then the increase in the nominal interest rate implies an increase in the real interest rate. If expected inflation has increased by more than 0.5%, then the real interest rate has declined, which will encourage more spending that might fuel further increases in inflation.
You might also like to view...
The quantity of labor demanded by a firm depends upon
A) the nominal wage rate not the real wage rate. B) the real wage rate not the nominal wage rate. C) both the real wage rate and the nominal wage rate. D) neither the real wage rate nor the nominal wage rate. E) either the real wage rate or the nominal wage rate, depending whether the price level is increasing or decreasing.
An increase in the quantity of money ________ aggregate demand and ________
A) increases; shifts the aggregate demand curve rightward B) increases; shifts the aggregate demand curve leftward C) decreases; shifts the aggregate demand curve leftward D) increases; rotates the aggregate demand curve so it is steeper E) decreases; shifts the aggregate demand curve rightward