To ________ the long-term expected real interest rate in the United States,the Fed needs to ________.
A) lower; raise the long-term nominal interest rate
B) lower; raise the long-term expected inflation rate
C) raise; lower the long-term nominal interest rate
D) raise; raise the long-term expected inflation rate

Question

Quizplus · Accepted Answer

According to the Fisher Effect, the long-term expected real interest rate is equal to the long-term nominal interest rate minus the long-term expected inflation rate. Therefore, to lower the long-term expected real interest rate, the Fed needs to raise the long-term expected inflation rate (Option D) or lower the long-term nominal interest rate (Option A). However, raising the long-term expected inflation rate may lead to higher inflation, which is not desirable. Therefore, the best option is to lower the long-term expected real interest rate by raising the long-term nominal interest rate, which can be achieved by the Fed raising short-term interest rates. This will lead to a decrease in borrowing and investment, which will reduce economic growth and inflation in the long run. Therefore, Option B is the best choice.

To ________ the Long-Term Expected Real Interest Rate in the United