At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, the nominal interest rate i_t equals all of the following except: A)ρ + π_t. B)r_t + π_t. C)ρ + E_tπ_{t + 1.} D)ρ + r_t.

Question

Quizplus · Accepted Answer

In the long-run equilibrium, the nominal interest rate equals the real interest rate plus the inflation rate. Therefore, it equals ρ + π_t (A) and r_t + π_t (B), and it can also be expressed as ρ + E_tπ_{t + 1} (C) when considering expected inflation. However, ρ + r_t (D) does not account for inflation, so it is not equal to the nominal interest rate.

At Long-Run Equilibrium in the Dynamic Model of Aggregate Demand