Given a Monetary Policy Rule of the Form R =

question 9

Multiple Choice

Given a monetary policy rule of the form r = p + 0.5Y^{^} + 0.5p - p*) + 0.03, a negative aggregate demand shock resulting in a -5 percent GDP gap leads the Fed to

• A) lower nominal interest rates by 5 percent.
• B) lower the real interest rate target by 2.5 percent.
• C) lower nominal interest rates by 2.5 percent.
• D) lower the inflation target by 2.5 percent.
• E) wait and see if the shock turned out to be a permanent change.

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