Question

Central bankers with a relatively flat monetary policy reaction curve will: move interest rates more aggressively when inflation rises, leading to more volatility in output. move interest rates more aggressively when inflation rises, leading to less volatility in output. move interest rates less aggressively when inflation rises, leading to more volatility in output. move interest rates less aggressively when inflation rises, leading to less volatility in output.

Answer 1

Answer:

The correct answer is the last statement.

Explanation:

The monetary policy reaction curve shows the relationship between the inflation rate and interest rates. There exist a positive relationship between inflation and interest rates. That is an increase in one causes others to increase as well.

That is why the reaction curve is upward sloping. A steeper curve means that a small change in inflation leads to a greater increase in interest rates causing a greater change in output level.

A flatter curve, on the contrary, means that a greater change in inflation would cause a smaller change in interest rate. This would cause smaller change in output as well.