If the inflation rate displays inertia in the short run, a one percentage point increase of the nominal interest rate will lead to: a one percentage point increase of the real interest rate a one percentage point increase of the inflation rate a one percentage point increase of the money growth rate a one-percentage point decrease of the inflation
If the inflation rate displays inertia in the short run, a one percentage point increase of the nominal interest rate will lead to: a one percentage point increase of the real interest rate a one percentage point increase of the inflation rate a one percentage point increase of the money growth rate a one-percentage point decrease of the inflation
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:**Quiz Question: Economic Shocks and the MP Curve**
Following a large negative aggregate demand shock, a shift _____ of the MP curve can bring the economy back to its potential output unless the economy falls into ______ trap.
- ○ up; a deflation
- ○ down; a liquidity
- ○ down; an inflation
- ○ up; an unemployment
**Correct Answer:**
- ● up; a deflation
This question assesses your understanding of the relationships between aggregate demand shocks, the MP curve (Monetary Policy curve), and potential economic traps like deflation.
Transcribed Image Text:**Question:**
If the inflation rate displays inertia in the short run, a one percentage point increase of the nominal interest rate will lead to:
- ○ a one percentage point increase of the real interest rate
- ● a one percentage point increase of the inflation rate
- ○ a one percentage point increase of the money growth rate
- ○ a one-percentage point decrease of the inflation rate
**Explanation:**
The correct answer, indicated by the filled circle, is "a one percentage point increase of the inflation rate." This question assesses the understanding of economic concepts related to interest rates and inflation inertia. Inflation inertia refers to the tendency of inflation to persist over time due to factors like expectations, wage-setting behaviors, and contractual arrangements.
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