An increase in expected inflation causes the real interest rate to ________ and output to ________ in the short run,before prices adjust to restore equilibrium.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall

Question

Quizplus · Accepted Answer

An increase in expected inflation lowers the real interest rate because the nominal interest rate does not immediately adjust. This lower real interest rate stimulates investment and consumption, leading to an increase in output in the short run.

An Increase in Expected Inflation Causes the Real Interest Rate