Suppose that the economy experiences a sharp decrease in energy costs and, in response, the central bank engages in a discretionary policy to decrease the real interest rate. Then:
Hi, which one is the correct answer, and why. I would like to understand the reason. Thank you.
Suppose that the economy experiences a sharp decrease in energy costs and, in response, the central bank engages in a discretionary policy to decrease the real interest rate. Then:
a. The central bank is likely adopting a policy to stabilize inflation in the short-run.
b. Inflation fluctuates around its long-run level, first going below it and then going above it.
c. The central bank will eventually need to increase the real interest rate to its original value in order to ensure that inflation returns to its original rate. d. All of the above.
e. None of the above.
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