Because wage rate increases and inflation rates are sticky, a cut in the target inflation rate pursued by monetary policy requires a short-run:

Question

Quizplus · Accepted Answer

A cut in the target inflation rate typically leads to higher real interest rates in the short run, as nominal rates adjust more quickly than inflation expectations. This dampens investment and consumption, leading to a fall in output.

Because Wage Rate Increases and Inflation Rates Are Sticky, a Cut