To prevent inflation from becoming permanently higher following an adverse inflation shock the Fed must ____, while to offset the effect of an increase in aggregate demand the Fed must _____.
A)lower the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run
B)raise the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run
C)maintain the inflation rate target; maintain the real interest rate target
D)maintain the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run

Question

Quizplus · Accepted Answer

To prevent inflation from becoming permanently higher, the Fed should maintain its inflation rate target to anchor expectations. To offset an increase in aggregate demand, the Fed should adjust the real interest rate to ensure that saving equals investment in the long run, stabilizing the economy.

To Prevent Inflation from Becoming Permanently Higher Following an Adverse