A downward shift in the Fed's reaction function is equivalent to:
A)a decline in the Fed's long-term target for inflation.
B)an increase in the Fed's long-term target for inflation.
C)an upward shift of short-run aggregate supply.
D)a downward shift of short-run aggregate supply.

Question

Quizplus · Accepted Answer

A downward shift in the Fed's reaction function is equivalent to an increase in the Fed's long-term target for inflation as it leads to a permanently higher rate of inflation.

A Downward Shift in the Fed's Reaction Function Is Equivalent