If the Fed's policy reaction function equals r = .02 + $\pi$, where r is the real interest rate, $\pi$ is the inflation rate. When the inflation rate is zero, then the real interest rate will:

Question

Quizplus · Accepted Answer

According to the reaction rule, the Federal Reserve will set the real interest rate to whatever the rate of inflation is plus 2%. So in the absence of inflation, the real interest rate will be set at 2%.

If the Fed's Policy Reaction Function Equals R = π\piπ , Where R Is the Real Interest Rate

If the Fed's Policy Reaction Function Equals R = $\pi$ , Where R Is the Real Interest Rate