An upward shift in the Fed's policy reaction function is a _____ of monetary policy, and the aggregate demand curve _______.
A) tightening; shifts right
B) easing; shifts right
C) tightening; shifts left
D) easing; shifts left

Question

Quizplus · Accepted Answer

A tighter monetary policy, which is seen as an upward shift in the Fed's policy reaction, means that the Fed is setting the real interest rate higher than before at each given rate of inflation. This reduces aggregate expenditure and the short-run equilibrium output at each rate of inflation. Alternatively, we can say that each level of inflation now corresponds to a new level of output. Thus an upward shift of the Fed's policy reaction function shifts the AD curve leftward.

An Upward Shift in the Fed's Policy Reaction Function Is