What would be the impact on the monetary policy reaction curve if the Fed were to raise the target inflation rate?
A) The monetary policy reaction curve shifts 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 shifts to the right

Question

Quizplus · Accepted Answer

If the Fed were to raise the target inflation rate, this would signal an increased willingness to tolerate higher inflation. As a result, the monetary policy reaction curve would shift to the right, indicating that the Fed would be willing to tolerate higher inflation rates at any level of output. This is because the Fed would need to use a looser monetary policy, such as lowering interest rates, to stimulate demand and raise inflation to the new target level.

What Would Be the Impact on the Monetary Policy Reaction