If monetary policymakers respond aggressively to current inflation above the target inflation rate, the:
A)Monetary policy reaction curve would be flat
B)Dynamic aggregate demand curve would have a steep slope
C)Monetary policy reaction curve would have a positive and steep slope
D)Dynamic aggregate demand curve would shift rightward

Question

Quizplus · Accepted Answer

If monetary policymakers respond aggressively to current inflation above the target inflation rate, it means they would implement contractionary monetary policy by increasing interest rates and reducing the money supply. This would result in a positive and steep slope on the monetary policy reaction curve, indicating that a larger change in interest rates is required to achieve a given reduction in inflation. It does not affect the dynamic aggregate demand curve, which represents the relationship between overall economic activity and the price level.

If Monetary Policymakers Respond Aggressively to Current Inflation Above the Target