If the Fed's policy reaction function equals r = .02 + $\pi$, where r is the real interest rate, $\pi$ is the inflation rate. If the real rate of interest is set at 5%, then the rate of inflation must be:

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 if the rate of real interest is 5%, the rate of inflation must be 3% (5 - 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