With the policy rate set at zero,the rise in expected inflation will lead to a ________ in the real interest rate,which will cause investment spending and aggregate output to ________.
A)fall;rise
B)fall;fall
C)rise;rise
D)rise;fall

Question

Quizplus · Accepted Answer

When the policy rate is set at zero, an increase in expected inflation decreases the real interest rate (since the real interest rate = nominal interest rate - inflation, and the nominal rate is fixed at zero). Lower real interest rates make borrowing cheaper, encouraging investment spending and thus increasing aggregate output.

With the Policy Rate Set at Zero,the Rise in Expected