Suppose that a change in the expected inflation rate leads supply and demand to adjust so that the after-tax expected real interest rate is unchanged at 2.0 percent. The tax rate is 30 percent. Initially, the expected inflation rate is 3.0 percent. If the expected inflation rate rises from 3 percent to 6 percent, the nominal interest rate
A. rises by 3 percent.
B. rises by 4.25 percent.
C. falls by 4.25 percent.
D. falls by 3 percent.
Answer: B
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What will be an ideal response?