At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, the nominal interest rate, i_t, equals all of the following except: A) $r _ { \mathrm { t } } + \pi _ { \mathrm { t } } ^ { * }$ B) r_t + $\pi$_t C) $\rho$ + E_t $\pi$_{t + 1} D) $\rho$ + r_t

Question

Quizplus · Accepted Answer

At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, the nominal interest rate is determined by inflation expectations and the natural rate of interest. Therefore, the nominal interest rate, iS1U1B1tS1U1B0, should equal the sum of the real interest rate, rS1U1B1tS1U1B0, and the expected inflation rate, F1F1F1S1F1F1F10.

Option A is correct because it represents the sum of the real interest rate and the expected inflation rate.

Option B is incorrect because it includes an additional term, F1F1F1S1F1F1F10S1U1B1t, which is the actual inflation rate. At long-run equilibrium, the actual inflation rate should be equal to the expected inflation rate, making this term unnecessary.

Option C is incorrect because it includes a term involving the exchange rate, ES1U1B1tS1U1B0, which is not relevant for determining the nominal interest rate in the dynamic model of aggregate demand and aggregate supply.

Option D is correct because it represents the sum of the real interest rate and the expected inflation rate, as explained above.

At Long-Run Equilibrium in the Dynamic Model of Aggregate Demand rt+πt∗r _ { \mathrm { t } } + \pi _ { \mathrm { t } } ^ { * }rt​+πt∗​

At Long-Run Equilibrium in the Dynamic Model of Aggregate Demand $r _ { \mathrm { t } } + \pi _ { \mathrm { t } } ^ { * }$