EXPLAIN HOW TARGETING INTEREST RATES CAN RESULT IN INFLATION SPIRAL...

3) - TEST BANK CHAPTER 18 CONDUCT OF MONETARY POLICY GOALS AND TARGETS TÀI CHÍNH TIỀN TỆ
TEST BANK CHAPTER 18 CONDUCT OF MONETARY POLICY GOALS AND TARGETS TÀI CHÍNH TIỀN TỆ
3) Explain how targeting interest rates can result in inflation spiraling out of control. Answer: If a central bank has an interest rate target, and increasing inflation causes increases in inflationary expectations, and through the Fisher effect, increases in nominal interest rates, the central bank will respond with increases in the money supply in an attempt to lower interest rates. However, the monetary expansion will increase inflation, starting the cycle again. As long as the central bank pursues the interest rate target, inflation will continue to spiral upward.