This is because the central bank aims to raise the real interest rate when inflation rises. The real interest rate is the nominal interest rate minus the inflation rate. If the nominal rate only increases by the same amount as inflation, the real rate remains unchanged. To curb inflation, a higher real rate is needed to cool down the economy.
The Taylor's rule in monetary policy specifies that if inflation rises by 1 percentage point,
Asked in WBCS Main Paper 5 2022 · Topic: Money & Banking (Monetary Policy: Objectives, Instruments (quantitative and qualitative), and Transmission Mechanism)
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Answer: C. the nominal interest rate should be increased by more than 1 percentage point.
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