Explain the effects of reducing the real interest rate


Suppose the central bank surprisingly and substantially reduces the real interest rate and that this drastic action leads to increased worries among households and businesses about what information the central bank might have about the economy. The effects of these actions would be:

a. Inflation would definitely increase.
b. Inflation would definitely decrease.
c. Inflation would definitely not change.
d. What happened to inflation is indeterminate.

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Microeconomics: Explain the effects of reducing the real interest rate
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