Interest Rate set by Fed 3 Inflation RF2 RF1 RF3 元 Inflation Rate Output Y AD2 AD1 AD 3

Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter22: Money Growth And Inflation
Section22.2: The Costs Of Inflation
Problem 2QQ
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Based on the given figure, the economy is initially at point A on the monetary policy reaction function (RF1) and the aggregate demand curve (AD1). The actual rate of inflation is π' and the Federal Reserve's target inflation rate is π*1. 

 

If the Federal Reserve lowers its target inflation rate to π*2, then the Federal Reserve's monetary policy reaction function will ________ and the aggregate demand curve will ________.

Select one:

a. shift to RF2; shift to AD2

b. shift to RF2; shift to AD3

c. shift to RF3; shift to AD3

d. shift to RF3; shift to AD2 

Interest Rate set by Fed
3
Inflation
RF2
RF1
RF3
元
Inflation Rate
Output Y
AD2
AD1
AD 3
Transcribed Image Text:Interest Rate set by Fed 3 Inflation RF2 RF1 RF3 元 Inflation Rate Output Y AD2 AD1 AD 3
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