Based on the Figure Below, the Economy Is Initially at Point

Multiple Choice

Based on the figure below, the economy is initially at point A on the monetary policy reaction function (RF1) and the aggregate demand curve (AD1) . The actual rate of inflation is $\pi$ ' and the Federal Reserve's target inflation rate is $\pi$ *1. If the Federal Reserve lowers its target inflation rate to $\pi$ *₂, then the Federal Reserve's monetary policy reaction function will _____ and the aggregate demand curve will _____.

A) shift to RF₃; shift to AD₂
B) shift to RF₂; shift to AD₂
C) shift to RF₃: shift to AD₃
D) shift to RF₂: shift to AD₃