Exhibit 27-1
-Suppose the Fed decides to increase the real interest rate. According to the data in Exhibit 27-1,
A)the gap between real and potential GDP must be increasing.
B)inflation must be increasing.
C)inflation must be constant, and the gap between real and potential GDP must be increasing.
D)inflation must be increasing or the gap between real and potential GDP must be increasing.
E)inflation must be increasing, and the gap between real and potential GDP must be increasing.

Question

Exhibit 27-1 
-Suppose the Fed decides to increase the real interest rate. According to the data in Exhibit 27-1,
A)the gap between real and potential GDP must be increasing. 
B)inflation must be increasing. 
C)inflation must be constant, and the gap between real and potential GDP must be increasing. 
D)inflation must be increasing or the gap between real and potential GDP must be increasing. 
E)inflation must be increasing, and the gap between real and potential GDP must be increasing.

Quizplus · Accepted Answer

According to Exhibit 27-1, when the Fed increases the real interest rate, both inflation and the gap between real and potential GDP can either increase or remain constant. Therefore, the best choice is D, which states that inflation must be increasing or the gap between real and potential GDP must be increasing.

Exhibit 27-1 -Suppose the Fed Decides to Increase the Real Interest Rate