Suppose an expansionary monetary policy reduces nominal interest rates. If this is the case, it follows that the expansionary monetary policy must have:
A)reduced expected inflation.
B)increased expected inflation.
C)increased expected inflation less than it reduced real interest rates.
D)reduced real interest rates less than it increased expected inflation.

Question

Quizplus · Accepted Answer

Expansionary monetary policy typically reduces real interest rates, which can lead to an increase in expected inflation. If nominal interest rates fall, it suggests that the increase in expected inflation is less than the reduction in real interest rates.

Suppose an Expansionary Monetary Policy Reduces Nominal Interest Rates