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, monetary policymakers can increase the real interest rate at every rate of inflation. This will reduce the aggregate demand and thus balance out the increase in government purchases without causing an increase in inflation. Shifting the monetary policy reaction curve to the right, as in option A, would result in an increase in inflation at every real interest rate and defeat the purpose of controlling inflation. Doing nothing, as in option B, may not bring about the desired results and lead to higher inflation. Increasing the growth rate of money, as in option D, will only increase inflation without controlling the increase in aggregate demand caused by government purchases.

If Monetary Policymakers Do Not Want an Increase in Government