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

According to the Phillips Curve model, a lower inflation rate would result in a lower level of aggregate demand. As a result, the monetary policy reaction curve would shift downward. Moreover, the dynamic aggregate demand curve would also move downward due to the lower inflation expectation, resulting in a movement down along the dynamic aggregate demand curve.

An Inflation Rate Below the Target Rate Will Result In