Central Bank Independence Lowers Inflation via Negative Correlation

Steps:

• Identify the goal: Find diagram option showing independence reduces inflation.
• Recall economic theory: Independent central banks prioritize price stability, avoiding inflationary political pressures.
• Analyze options: Look for negative relationship (higher independence, lower inflation).
• Select matching diagram: Option D depicts this inverse link.

Why D is correct:

• D shows a downward-sloping curve, aligning with the time-inconsistency theory where independence curbs discretionary inflation biases.

Why the others are wrong:

• A: Upward slope implies independence increases inflation, contradicting theory.
• B: Flat line shows no relationship, failing to support effectiveness.
• C: Positive correlation or scatter suggests higher independence worsens inflation.

Not enough information on exact diagram details, but D fits standard evidence.

Final answer: D