A reduction in the central bank's inflation target shifts the dynamic aggregate demand curve to the left resulting in:
A)Lower current output and higher inflation
B)Higher current output and higher inflation
C)Lower current output and lower inflation
D)Higher current output and lower inflation

Question

Quizplus · Accepted Answer

A reduction in the central bank's inflation target implies a willingness to tolerate higher levels of inflation. This, in turn, signals to the private sector that future inflation rates are likely to be higher, leading to higher inflation expectations. As a result, the dynamic aggregate demand curve shifts to the left, implying lower current output and lower inflation.

A Reduction in the Central Bank's Inflation Target Shifts the Dynamic