Which of the following statements is incorrect?
A) A fall in the central bank's target inflation rate shifts the monetary policy reaction curve to the left.
B) A decrease in the central bank's inflation target raises the real interest rate policymakers set at each level of inflation.
C) Shifts in the monetary policy reaction curve shift the dynamic aggregate demand curve in the same direction.
D) A fall in the central bank's target inflation rate causes the monetary policy reaction curve to flatten.

Question

Quizplus · Accepted Answer

A fall in the central bank's target inflation rate does not cause the monetary policy reaction curve to flatten; instead, it shifts the curve without necessarily changing its slope. The slope of the curve is determined by how aggressively the central bank adjusts the real interest rate in response to changes in inflation, not by its inflation target.

Which of the Following Statements Is Incorrect