A ________supply shock ________ prices will cause the real interest rate to ________ in the short run.
A) temporary; raises; rise
B) temporary; lowers; fall
C) permanent; raises; fall
D) permanent; lowers; rise

Question

Quizplus · Accepted Answer

A positive supply shock (temporary increase in supply that lowers prices) will cause inflation to decrease in the short run, which in turn will cause the central bank to decrease the nominal interest rate to stimulate economic growth. Since the real interest rate is the nominal interest rate minus inflation, a decrease in inflation and the nominal interest rate will lead to a rise in the real interest rate.

A ________Supply Shock ________ Prices Will Cause the Real Interest

A Supply Shock Prices Will Cause the Real Interest