To reduce the demand for goods and services, the central bank will ___ its target inflation rate and _____ nominal and real interest rates.
A) reduce; decrease
B) reduce; increase
C) raise; decrease
D) raise; increase

Question

Quizplus · Accepted Answer

If the central bank wants to reduce demand for goods and services, it will lower its target inflation rate to make borrowing more expensive. It will then increase nominal and real interest rates to make borrowing even more expensive, further reducing demand. Thus, reducing both nominal and real interest rates fits with lowering the target inflation rate to decrease demand.

To Reduce the Demand for Goods and Services, the Central