When the central bank lowers its target inflation rate, it _____ the nominal and real interest rate, which shifts the dynamic aggregate demand curve to the _____.
A) lowers; right
B) lowers; left
C) raises; right
D) raises; left

Question

Quizplus · Accepted Answer

When the central bank lowers its target inflation rate, it typically raises interest rates to cool down the economy and reduce inflationary pressures. Higher interest rates increase the cost of borrowing, which can reduce spending and investment, leading to a shift of the dynamic aggregate demand curve to the left.

When the Central Bank Lowers Its Target Inflation Rate, It