Inflation runs at 8% and the central bank raises the nominal rate from 5% to 7%. Has policy tightened?

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Question

Inflation runs at 8% and the central bank raises the nominal rate from 5% to 7%. Has policy tightened?

Accepted Answer

No, because the real rate is still negative at −1% — Award 1 mark. Working: 7% − 8%. A central bank must raise the nominal rate by more than inflation to tighten at all.

Answer

Yes, because any rise in the nominal rate tightens policy

Answer

Yes, because the nominal rate has risen by two percentage points

Answer

No, because the real rate is still negative at −1%

Answer

No, because interest rates have no effect during inflation

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