If the Fed's monetary policy reaction function does not change, then when inflation decreases the Fed responds by ________ the real interest rate, which ________ consumption and investment spending, which ________ output.
A)decreasing; increases; increases
B)increasing; increases; decreases
C)increasing; decreases; decreases
D)decreasing; decreases; decreases

Question

Quizplus · Accepted Answer

When the inflation rate decreases, the Fed responds by lowering the real interest rate per its reaction function. This decrease in the real interest rate increases consumption and investment, thereby increasing the short-run equilibrium output.

If the Fed's Monetary Policy Reaction Function Does Not Change