If monetary policymakers do not change their inflation target and aggregate demand shifts left:
A)There will be a temporary decrease in output
B)Potential output will decrease
C)There will be an increase in inflation in the long run
D)It will result in a permanent reduction in inflation

Question

Quizplus · Accepted Answer

If aggregate demand shifts left and the inflation target remains unchanged, there will be a temporary decrease in output as firms reduce production and lay off workers in response to lower demand. In the long run, however, this decrease in output may lead to a decrease in potential output, which means that the economy may never fully recover from the shock. While there may be a short-term reduction in inflation due to lower demand and lower prices, this is unlikely to be permanent if the inflation target remains unchanged.

If Monetary Policymakers Do Not Change Their Inflation Target and Aggregate