The effect on the monetary policy reaction curve resulting from policymakers increasing their inflation target would be:
A)The monetary policy reaction curve shifting to the left
B)A movement up the existing monetary policy reaction curve
C)A movement down the existing monetary policy reaction curve
D)The monetary policy reaction curve shifting to the right

Question

Quizplus · Accepted Answer

Increasing the inflation target would lead to a higher level of acceptable inflation, and thus the central bank would need to pursue a looser monetary policy in order to achieve this higher target. This would result in a shift of the monetary policy reaction curve to the right, indicating that a higher level of inflation would be associated with a lower interest rate.

The Effect on the Monetary Policy Reaction Curve Resulting from Policymakers