A temporary supply shock that raises prices will cause the real interest rate to
A)rise in both the short and long runs.
B)rise in the short run but not in the long run.
C)fall in both the short and long runs.
D)fall in the short run but not in the long run.

Question

Quizplus · Accepted Answer

In the short run, the temporary supply shock will raise prices, but the nominal interest rate might not fully adjust, leading to an increase in the real interest rate. However, in the long run, the nominal interest rate will adjust to the higher inflation rate, causing the real interest rate to return to its original level.

A Temporary Supply Shock That Raises Prices Will Cause the Real