If
In the simple monetary rule and the inflation rate is 2 percent below the target inflation rate,the Federal Reserve will:
A)lower the target rate by 2 percent.
B)raise the interest rate by 1 percent.
C)lower the interest rate by 1 percent.
D)lower the marginal product of capital by 1 percent.
E)Not enough information is given.

Question

If 
In the simple monetary rule and the inflation rate is 2 percent below the target inflation rate,the Federal Reserve will:
A)lower the target rate by 2 percent. 
B)raise the interest rate by 1 percent. 
C)lower the interest rate by 1 percent. 
D)lower the marginal product of capital by 1 percent. 
E)Not enough information is given.

Quizplus · Accepted Answer

The simple monetary rule states that the central bank should adjust the nominal interest rate to achieve the target inflation rate. If the actual inflation rate is 2 percent below the target inflation rate, it implies that the economy is experiencing deflationary pressure, and the central bank can counteract it by lowering the interest rate by 1 or 2 percent, depending on how far below the target rate the current inflation rate is. Lowering the interest rate increases the demand for credit and investment, which stimulates economic growth and raises the inflation rate towards the target level. Therefore, the correct answer is C, which states that the Federal Reserve will lower the interest rate by 1 percent.

If In the Simple Monetary Rule and the Inflation Rate Is