Suppose that the inflation rate falls.If the Federal Reserve wants to increase i

Question

Suppose that the inflation rate falls.If the Federal Reserve wants to increase investment to increase therate of growth in the economy, it is not enough to lower thenominal interest rate. The Fed must also do which of thefollowing?
A.   Raise the real interest rate bylowering the nominal interest rate more than the decrease in theinflation rate. B.   Raise the real interest rate, byraising the nominal interest rate more than the decrease in theinflation rate. C.   Lower the real interest rate byraising the nominal interest rate more than the decrease in theinflation rate. D.   Lower the real interest rate bylowering the nominal interest rate less than the decrease in theinflation rate. E.   Lower the real interest rate bylowering the nominal interest rate more than the decrease in theinflation rate.

Explanation / Answer

http://www.frbsf.org/publications/economics/letter/1993/el93-38.pdf E.   Lower the real interest rate bylowering the nominal interest rate more than the decrease in theinflation rate. In my opinion, we kinda try to inflate the economy throughcreating more money which the nominal interest has to decrease morethan the decrease of inflation rate E.   Lower the real interest rate bylowering the nominal interest rate more than the decrease in theinflation rate. In my opinion, we kinda try to inflate the economy throughcreating more money which the nominal interest has to decrease morethan the decrease of inflation rate E.   Lower the real interest rate bylowering the nominal interest rate more than the decrease in theinflation rate.

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