To Prevent Inflation from Becoming Permanently Higher Following an Adverse

Multiple Choice

To prevent inflation from becoming permanently higher following an adverse inflation shock the Fed must ____, while to offset the effect of an increase in aggregate demand the Fed must _____.

A) lower the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run
B) raise 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) maintain the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run