If monetary policymakers do not want an increase in government purchases, which increases aggregate demand, to cause an increase in inflation, they would:
A) shift the monetary policy reaction curve to the right, raising inflation at every real interest rate.
B) do nothing and let the economy's self-correcting mechanism work.
C) shift the monetary policy reaction function left, increasing the real interest rate at every rate of inflation.
D) increase the growth rate of money.

Question

Quizplus · Accepted Answer

By shifting the monetary policy reaction function left, policymakers will increase the real interest rate at every rate of inflation, which will help to counteract the increase in aggregate demand caused by higher government purchases. This can help to prevent inflation from rising too much in response to the government spending increase. Shifting the monetary policy reaction curve to the right or increasing the growth rate of money would both lead to higher inflation, which is not desirable in this case. Doing nothing and relying on the self-correcting mechanism of the economy may not be enough to prevent inflation from rising.

If Monetary Policymakers Do Not Want an Increase in Government