1. In the IS-MP-PC model with > 1, what happens when the economy starts out with the public's inflation expectations equalling the central bank's inflation target and then their inflation expectations rise above the central bank's target rate?

(A) Inflation increases, output falls and real interest rates rise.

(B) Inflation increases, output increases and real interest rates rise.

(C) Inflation increases, output falls and real interest rates fall.

(D) Inflation increases, output increases and real interest rates fall.

1. The Taylor principle refers to the idea that
2. (A)Central banks should adjust their policy interest rates by less than the change in inflation.
3. (B)Central banks should adjust their policy interest rates by more than the change in inflation.
4. (C)Central banks should adjust their policy interest rates in line with inflation and the output gap.
5. (D)Central banks should adjust their policy interest rates in line with inflation only.