A rise in __________ must lead to a larger rise in the ________________, for only then will the real interest rate be higher and support a return to the equilibrium inflation rate.

Question

Quizplus · Accepted Answer

The correct answer is C) inflation, nominal interest rate. This is because when inflation rises, the nominal interest rate must also rise to ensure that the real interest rate (nominal interest rate minus inflation) increases. This adjustment is necessary to maintain or return to equilibrium in the inflation rate, as it affects the cost of borrowing and the incentive to save.

A Rise in __________ Must Lead to a Larger Rise