4. Suppose that the inflation rate rises.If the Federal Reserve wants to reduce

Question

4.   Suppose that the inflation rate rises.If the Federal Reserve wants to reduce investment to slow the rateof growth in the economy, it is not enough to raise the nominalinterest rate. The Fed must also do which of the following?
A.   Raise the real interest rate byraising the nominal interest rate less than the increase in theinflation rate. B.   Lower the real interest rate byraising the nominal interest rate less than the increase in theinflation rate. C.   Lower the real interest rate byraising the nominal interest rate more than the increase in theinflation rate. D.   Raise the real interest rate byraising the nominal interest rate more than the increase in theinflation rate. E.   Keep the real interest rate constantby raising the nominal interest rate exactly as much as theincrease in the inflation rate. 4. Suppose that the inflation rate rises.If the Federal Reserve wants to reduce investment to slow the rateof growth in the economy, it is not enough to raise the nominalinterest rate. The Fed must also do which of the following? A. Raise the real interest rate byraising the nominal interest rate less than the increase in theinflation rate. B. Lower the real interest rate byraising the nominal interest rate less than the increase in theinflation rate. C. Lower the real interest rate byraising the nominal interest rate more than the increase in theinflation rate. D. Raise the real interest rate byraising the nominal interest rate more than the increase in theinflation rate. E. Keep the real interest rate constantby raising the nominal interest rate exactly as much as theincrease in the inflation rate.

Explanation / Answer

D.   Raise the real interest rate by raising the nominal interestrate more than the increase in the inflation rate. same logic here, in my opinion, we need to raise the interestrate more than the increase inflation rate in order prevent furtherinflation D.   Raise the real interest rate by raising the nominal interestrate more than the increase in the inflation rate.

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