If the Fed's Policy Reaction Function Equals R =

question 56

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. If the real rate of interest is set at 5 percent, then the rate of inflation must be:

• A)2 percent.
• B)3 percent.
• C)1 percent.
• D)4 percent.

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