The fact that central banks are able to influence _________ implies that they can also influence _________ in the desired direction,because ________ is slow to adjust.
A) short-term market interest rates;long-term real interest rates;output
B) short-term market interest rates;short-term real interest rates;output
C) short-term market interest rates;short-term real interest rates;inflation
D) long-term market interest rates;long-term real interest rates;output
E) long-term market interest rates;long-term real interest rates;inflation

Question

Quizplus · Accepted Answer

Central banks are able to influence short-term market interest rates through their monetary policies. By adjusting the supply of money in the economy, they can influence the demand for credit and therefore the interest rates. Short-term real interest rates are affected by inflation expectations, which in turn are affected by the central bank's monetary policy. The fact that inflation is slow to adjust provides the central bank with a long-term anchor for its policy decisions. Therefore, the central bank can influence inflation in the desired direction by affecting short-term interest rates.

The Fact That Central Banks Are Able to Influence _________