In the short run, when the Fed increases the nominal interest rate, the real interest rate
A) temporarily rises.
B) permanently rises.
C) temporarily falls.
D) permanently falls.
E) does not change.

Question

Quizplus · Accepted Answer

In the short run, when the Fed increases the nominal interest rate, the real interest rate temporarily rises. This is because the inflation expectations are sticky in the short run and therefore the increase in nominal interest rate leads to a rise in the real interest rate. However, over the long run, inflation expectations adjust and the real interest rate returns to its natural level.

In the Short Run, When the Fed Increases the Nominal