An increase in interest rate by the Federal Reserve will affect only real interest rates because:
A)inflation is sticky in the short run.
B)the relationship between money growth and inflation does not necessarily hold in the short run.
C)prices are flexible in the short and long runs.
D)contracts apply only in the very short run.
E)a and b are correct.

Question

Quizplus · Accepted Answer

An increase in interest rates affects real interest rates in the short run because inflation is sticky (A) and the relationship between money growth and inflation may not hold immediately (B).

An Increase in Interest Rate by the Federal Reserve Will