If the Fed's Policy Reaction Function Equals R =

question 161

Multiple Choice

If the Fed's policy reaction function equals r = .02 + π, where r is the real interest rate and π is the inflation rate. When the inflation rate is zero, then the real interest rate will be:

• A)set to equal 2 percent.
• B) below the target value for the real interest rate.
• C)set to equal zero.
• D)set to equal 4 percent.

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