According to the monetary policy rule, the central bank sets the nominal interest rate so the real interest rate
When inflation is above its target and the real interest rate when output is below its natural level.
A)rises; falls
B)rises; rises
C)falls; falls
D)falls; rises

Question

Quizplus · Accepted Answer

When inflation is above its target, the central bank needs to increase the nominal interest rate to reduce aggregate demand and bring inflation back to target. This leads to a rise in the real interest rate, which is the nominal interest rate adjusted for inflation. When output is below its natural level, the central bank wants to stimulate aggregate demand and boost the economy by lowering the real interest rate. This can be achieved by decreasing the nominal interest rate, which leads to a fall in the real interest rate. Therefore, the correct answer is A - rises; falls.

According to the Monetary Policy Rule, the Central Bank Sets