Suppose the Public Expects a 7 Percent Inflation Rate, and Both

question 31

Multiple Choice

Suppose the public expects a 7 percent inflation rate, and both the money supply and money demand grow at 7 percent a year. The Federal Reserve decides to keep the money growth rate at 7 percent. In the short run, we expect that

• A) real interest rates will remain constant.
• B) real interest rates may increase or decrease.
• C) real interest rates will decrease.
• D) real interest rates will increase.

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