The economy moves down a stationary aggregate demand curve when the Fed:
A)increases its target inflation rate, reflected by a downward shift in the Fed's policy reaction function.
B)decreases its target inflation rate, reflected by an upward shift in the Fed's policy reaction function.
C)increases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function.
D)decreases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function.

Question

Quizplus · Accepted Answer

For a fixed inflation rate target, a decrease in interest rates corresponds to a decrease in the inflation rate. A lower inflation rate is seen as a movement down the aggregate demand curve, as the rate of inflation is measured on the vertical axis when drawing aggregate demand.

The Economy Moves Down a Stationary Aggregate Demand Curve When