An inflation rate below the target rate will result in:
A) a movement up along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve.
B) a movement down along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve.
C) a movement up along the monetary policy reaction curve and a rightward shift of the dynamic aggregate demand curve.
D) a movement up along the monetary policy reaction curve and a leftward shift of the dynamic aggregate demand curve.

Question

Quizplus · Accepted Answer

A lower inflation rate than the target rate indicates that there is less demand-pull inflation pressure in the economy. As a result, the central bank will respond by lowering interest rates (moving down the monetary policy reaction curve) to stimulate spending and investment, which, in turn, will increase aggregate demand. This will shift the dynamic aggregate demand curve downwards, as lower interest rates make borrowing cheaper and more attractive, which stimulates spending and investments. Therefore, option B is the correct answer.

An Inflation Rate Below the Target Rate Will Result In