If the Fed's Policy Reaction Function Equals R = $\pi$ , Where R Is the Real Interest Rate

question 158

Multiple Choice

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

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

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