According to the monetary policy rule, when inflation is at its target level and output is at the natural level, then the real interest rate equals the:
A) nominal rate of interest.
B) target rate of inflation.
C) natural rate of interest.
D) current rate of inflation.

Question

Quizplus · Accepted Answer

According to the monetary policy rule, when inflation is at its target level and output is at the natural level, the real interest rate should be equal to the natural rate of interest, which is the rate consistent with output being at its natural level. This is because at this point, there is no need for expansionary or contractionary monetary policy to achieve the target inflation rate, and interest rates can be set at their natural level to promote economic stability.

According to the Monetary Policy Rule, When Inflation Is at Its