The long list of central bank goals includes the stability of interest rates and exchange rates. You look on the the central bank website and note that they have increased interest rates at every one of their meetings over the last year. You read the financial press and see references to how the exchange rate has moved in response to these interest-rate changes. How could you reconcile this behavior with the central bank pursuing its objectives?

Multiple-choice options are:

- This behavior simply illustrates that central banks have no idea how to achieve their objectives.

- The more the central bank moves interest rates, the more stable are interest rates and exchange rates.

- The central bank faces trade-offs among competing objectives and faced a situation where increasing interest rates was necessary to boost economic growth in the short run.

- The central bank faced a situation where increasing interest rates was necessary to curb emerging inflationary pressures and considered low and stable inflation a more important objective than interest-rate and exchange-rate stability.