If the central bank did not follow the Taylor principle and

If the central bank did not follow the Taylor principle, and increase in inflation would lead to ________.

A. a decrease in the nominal interest rate

B. a decrease in aggregate expenditure

C. an increase in inflation

D. all of the above

E. none of the above

Solution

A. a decrease in the nominal interest rate.

The Taylor rule suggests the centarl bank to how to alter the interest rates according to the changing economic condition in the econonomy. So when theh central did not follow the Taylor rule, an increase in the inflation would lead to a decrease in the nominal interest rate.