When the rate of inflation rises, the central bank should
A)raise the real rate of interest.
B)raise the nominal rate of interest.
C)lower the nominal rate of interest.
D)increase aggregate expenditures.
E)lower the real rate of interest.

Question

Quizplus · Accepted Answer

When the rate of inflation rises, the central bank should raise the real rate of interest. This will reduce borrowing and spending, which will help to slow down the rate of inflation. A higher real interest rate also makes saving more attractive, which can increase savings and reduce inflationary pressures in the long run.

When the Rate of Inflation Rises, the Central Bank Should