An anonymous monetary policy that reduces real interest rates will ________ the inflation rate ________.
A) raise; temporarily
B) raise; permanently
C) lower; permanently
D) lower; temporarily

Question

Quizplus · Accepted Answer

When real interest rates are reduced, it becomes cheaper to borrow and more attractive to invest, which stimulates demand and increases economic activity. This temporary increase in demand can lead to higher prices and an increase in the inflation rate in the short-term. However, over the long-term, the increase in economic activity and productivity can lead to lower inflation.

An Anonymous Monetary Policy That Reduces Real Interest Rates Will