Suppose That a Change in the Expected Inflation Rate Leads

question 22

Multiple Choice

Suppose that a change in the expected inflation rate leads supply and demand to adjust so that the after-tax expected real interest rate is unchanged at 2.0 percent.The tax rate is 30 percent.Initially, the expected inflation rate is 3.0 percent.If the expected inflation rate falls from 6 percent to 0 percent, the expected real interest rate

• A)rises by 1.25 percent.
• B)rises by 2.5 percent.
• C)falls by 2.5 percent.
• D)falls by 1.25 percent.