A downward 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

An easing of monetary policy, which is seen as a downward shift in the Fed's policy reaction, means that the Fed is setting the real interest rate lower than before at each given rate of inflation. This increases 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 a downward shift of the Fed's policy reaction function shifts the AD curve rightward.

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