If inflation does not adjust rapidly in the short run, then when the Federal Reserve increases the nominal interest rate, the real interest rate in the short run will:
A)increase.
B)decrease.
C)not change.
D)be determined by saving and investment decisions.

Question

Quizplus · Accepted Answer

Because inflation tends to adjust slowly, actions by the Fed to change the nominal interest rate generally lead the real interest rate to change by about the same amount. So when the Federal Reserve increases the nominal interest rate, the real interest rate in the short run will increase too.

If Inflation Does Not Adjust Rapidly in the Short Run