A permanent negative supply shock leads to ________ real interest rates ________.
A)higher;in both the short and long runs
B)higher;in the short run but not in the long run
C)lower;in both the short and long runs
D)lower;in the short run but not in the long run

Question

Quizplus · Accepted Answer

A permanent negative supply shock reduces potential output and increases prices. This causes inflationary pressure and reduces the demand for credit. In the short run, the central bank may respond by raising interest rates to combat inflation, leading to higher real interest rates. In the long run, the higher inflation expectations would be built into interest rates, leading to permanently higher real interest rates.

A Permanent Negative Supply Shock Leads to ________ Real Interest