Suppose that the Federal Reserve has a 2% target on inflation. If actual inflation is 2%, then, the Fed will:
A)want the new real interest rate to be higher than the neutral interest rate.
B)want the new real interest rate to be lower than the neutral interest rate.
C)want the new real interest rate to be equal to the inflation rate.
D)not change the real interest rate.

Question

Quizplus · Accepted Answer

If actual inflation is already at the Fed's target of 2%, there is no need to change the real interest rate. Keeping the real interest rate unchanged will maintain the current level of inflation.

Suppose That the Federal Reserve Has a 2% Target on Inflation