Suppose the economy is initially operating at the natural level of output. Now, suppose the central bank raises the inflation target by 3%. Given this information, we would expect that:
A) the real interest rate will increase by less than 3% in the medium run.
B) the real interest rate will decrease by less than 3% in the medium run.
C) the real interest rate will decrease by exactly 3% in the medium run.
D) the real interest rate will not change in the medium run.
E) the real interest rate will increase by exactly 3% in the medium run.

Question

Quizplus · Accepted Answer

In the medium run, the real interest rate is determined by the natural rate of output and is not affected by changes in the inflation target.

Suppose the Economy Is Initially Operating at the Natural Level