When the monetary policymakers raise the target inflation rate they:
A) raise the current real inflation rate at every level of current inflation.
B) lower the current real interest rate at every level of current inflation.
C) in effect shift the monetary policy reaction curve to the left.
D) in effect move up along the current monetary policy reaction curve.

Question

Quizplus · Accepted Answer

When the monetary policymakers raise the target inflation rate, they aim to increase the inflation rate. This, in turn, leads to a decrease in the real interest rate, which is the nominal interest rate adjusted for inflation. Therefore, option B is the correct answer as it suggests that the policymakers lower the current real interest rate at every level of current inflation.

When the Monetary Policymakers Raise the Target Inflation Rate They