To accommodate an adverse inflation shock the Fed must ____, while to offset the effect of an increase in aggregate demand the Fed must _____.
A)reduce the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run
B)increase the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run
C)maintain the inflation rate target; maintain the real interest rate target
D)adjust the real interest rate target to the level at which saving equals investment in the long run; reduce the inflation rate target

Question

Quizplus · Accepted Answer

To accommodate an adverse inflation shock, the Fed may increase the inflation rate target to allow for higher inflation temporarily. To offset an increase in aggregate demand, the Fed adjusts the real interest rate target to balance saving and investment in the long run.

To Accommodate an Adverse Inflation Shock the Fed Must ____