If a Central Bank Sets an Explicit Inflation Target, the Central

question 42

Multiple Choice

If a central bank sets an explicit inflation target, the central bank must:

• A)Put more emphasis on the interest rate target and less on a money target
• B)Shift its focus entirely to a nominal interest rate target
• C)Give up control of targeting the monetary base
• D)Be willing to live with more volatility in the interest rate

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Definitions:

Marginal Cost

The cost associated with producing one additional unit of a product.

Technological Change

Development of new technologies allowing factors of production to be used more effectively.

Isoquant

A curve representing all the combinations of inputs that yield the same level of output.

Isocost Line

A graph that shows all possible combinations of labor and capital that can be purchased for a given total cost.