Suppose the Public Expects a 7 Percent Inflation Rate, and Both

Multiple Choice

Suppose the public expects a 7 percent inflation rate, and both the money supply and money demand grow at 7 percent a year. Suddenly the Federal Reserve unexpectedly allows the money growth rate to be 5 percent. In the short run, we expect that

A) real interest rates will remain constant.
B) real interest rates may increase or decrease.
C) real interest rates will decrease.
D) real interest rates will increase.