To Accommodate an Adverse Inflation Shock the Fed Must ____

Multiple Choice

To accommodate an adverse inflation shock the Fed must ____, while to offset the effect of an increase in aggregate demand the Fed must _____.

A) reduce the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run
B) increase the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run
C) maintain the inflation rate target; maintain the real interest rate target
D) adjust the real interest rate target to the level at which saving equals investment in the long run; reduce the inflation rate target