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      Question

      Which of the following best describes the core principle

      of the Taylor policy rule?
      A It suggests that the central bank should maintain a constant money supply growth rate, regardless of economic conditions. Correct Answer Incorrect Answer
      B It proposes that the central bank should adjust the policy interest rate in response to deviations of inflation from its target and output from its potential. Correct Answer Incorrect Answer
      C It advocates for the central bank to intervene in foreign exchange markets to stabilize the national currency's value. Correct Answer Incorrect Answer
      D It states that the central bank should prioritize fiscal consolidation over monetary policy tools to achieve economic stability. Correct Answer Incorrect Answer

      Solution

      The core principle of the Taylor policy rule is that the central bank should adjust the policy interest rate in response to deviations of inflation from its target and output from its potential. It provides a formulaic approach for central banks to set interest rates to achieve price stability and output stability.

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