2009 exam Q 5: Taylor rule suggests that Bank of England should target a short term interest rate of 3.75% vs. current 5.5%. What will the effect on the economy?
I think this was the one where inflation was already like 4% or something… therefore lowering the rate almost 2% has the potential to send inflation way up…
lower short term interest rates leads to higher borrowing and spending, which n turn boosts the inflation (that is already much higher than the target inflation)…