Please help analyze this graph.

References

In this section, we will track the relationship between inflation and the central bank's monetary policy response. Specifically, inflation rises, and central banks have the incentive to increase the real interest rate. r = i . Where i is the nominal interest rate, and is inflation. Notice that as increases, it pulls r down, and hence in order to increase r back up, a central bank will then have to increase i. To this end, as we've discussed, central banks have a few tools at their disposal. One of them is to decrease the purchase of bonds from banks, taking liquidity (money supply) out of the banking system, and hence increasing the cost of borrowing, or i.

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