An increase in interest rates by the Fed based on a given and unchanged policy reaction function represents a ________ the aggregate demand curve, and higher interest rates resulting from an upward shift in the Fed's policy reaction function represents a ________ the aggregate demand curve.
A)shift left of; movement up
B)movement up; shift left of
C)shift left of; shift right of
D)movement up; shift right

Question

Quizplus · Accepted Answer

For a fixed inflation rate target, an increase in interest rates corresponds to an increase in the inflation rate. A higher inflation rate is seen as a movement up the aggregate demand curve, as the rate of inflation is measured on the vertical axis when drawing aggregate demand. An upward shift in the Fed's policy reaction function means that the Fed is setting the real interest rate higher than before at each given rate of inflation. So each level of inflation now corresponds to a new lower level of output. Thus an upward shift of the Fed's policy reaction function makes the AD curve shift to the left

An Increase in Interest Rates by the Fed Based on a Given