If the Fed's monetary policy reaction function does not change, then when inflation increases the Fed responds by ________ the real interest rate, which ________ consumption and investment spending, which ________ output.
A)increasing; increases; increases
B)increasing; increases; decreases
C)increasing; decreases; decreases
D)decreasing; decreases; decreases

Question

Quizplus · Accepted Answer

When the inflation rate increases, the Fed responds by raising the real interest rate per its reaction function. This increase in the real interest rate reduces consumption and investment, thereby reducing the short-run equilibrium output.

If the Fed's Monetary Policy Reaction Function Does Not Change