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

Question 21

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 π\pi ' and the Federal Reserve's target inflation rate is π\pi *1. Based on the figure below, the economy is initially at point A on the monetary policy reaction function (RF<sub>1</sub>) and the aggregate demand curve (AD<sub>1</sub>) . The actual rate of inflation is \pi ' and the Federal Reserve's target inflation rate is \pi *<sub>1</sub>. If the Federal Reserve raises its target inflation rate to \pi *<sub>3</sub>, then the Federal Reserve's monetary policy reaction function will _____ and the aggregate demand curve will _____. A) shift to RF<sub>3</sub>; shift to AD<sub>2</sub> B) shift to RF<sub>2</sub>; shift to AD<sub>2</sub> C) shift to RF<sub>3</sub>: shift to AD<sub>3</sub> D) shift to RF<sub>2</sub>: shift to AD<sub>3</sub> If the Federal Reserve raises its target inflation rate to π\pi *3, 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

Correct Answer:

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