Suppose the economy is initially operating at the natural level of output.Now,suppose the central bank reduces the rate of nominal money growth by 3%.Given this information,we would expect that
A)the real interest rate will fall by less than 3% in the medium run.
B)the real interest rate will fall by exactly 3% in the medium run.
C)the real interest rate will increase by exactly 3% in the medium run.
D)none of the above

Question

Quizplus · Accepted Answer

The nominal interest rate can be expected to fall as a result of the reduction in nominal money growth, but we cannot predict with certainty the effect on the real interest rate, as it depends on other factors such as changes in inflation expectations and productivity. Therefore, none of the given choices are accurate.

Suppose the Economy Is Initially Operating at the Natural Level