Question

In the long run the real interest rate is determined by and in the short-run the Federal Reserve can control the real interest rate by setting the nominal interest rate if inflation adjusts

Select one:

a. saving and investment; slowly

b. the Federal Reserve; to equal the increase in the money supply

c. the Federal Reserve; slowly

d. saving and investment; quickly

Answer 1

ans. a

Interest rate in equilbrium is where savings is equal to investment. Inflation adjusts slowly then real interest rate can be controlled by fed

real interest rate = nominal interest rate - inflation