If the Fed's Policy Reaction Function Equals R =

Multiple Choice

If the Fed's policy reaction function equals r = .02 + π, where r is the real interest rate and π is the inflation rate. If the real rate of interest is set at 5 percent, then the rate of inflation must be:

A) 2 percent.
B) 3 percent.
C) 1 percent.
D) 4 percent.