Question

“If f increases, then the Fed can keep output constant by reducing the real interest rate by the same amount as the increase in financial frictions.” Is this statement true, false, or uncertain? Explain your answer.

Short answer

The given statement is False, as at the point when the Federal Reserve brings down the civil finances rate by giving lesser liquidity to the banking system real interest rates fall in the short run.

Step-by-step solution

Concept 

Financial disunion is the difference between the return from business capital and the factual cost of the capital in the request. It can be measured as the difference between the borderline product of capital balanced for capital earnings and losses on that capital and short- term interest.

Explanation of Result 

The given statement is False, as at the point when the Federal Reserve brings down the civil finances rate by giving lesser liquidity to the banking systemreal interest rates fall in the short run, when the civil reserve raises the civil finances rate by lessening the measure of liquidity in banking system, real interest rates lift in the short run.
This will moderate the negative impacts of fiscal conflicts on enterprise. In any case, the reduction in the real interest rate will increase net exports, so that total affair will increase. In this way to annul the fiscal conflicts, the Fed would need to dwindle the real interest rate by a little bit lower than the change in$\overline{f}$ to keep affair constant.