Inflation targets can increase the central bank's flexibility in responding to declines in aggregate spending. Declines in aggregate ________ that cause the inflation rate to fall below the floor of the target range will automatically stimulate the central bank to ________ monetary policy without fearing that this action will trigger a rise in inflation expectations.
A)demand: tighten
B)demand;loosen
C)supply;tighten
D)supply;loosen

Question

Quizplus · Accepted Answer

A decline in aggregate demand can cause a fall in the inflation rate. If the inflation rate falls below the floor of the target range, the central bank could loosen monetary policy to stimulate aggregate demand without fearing that this action will trigger a rise in inflation expectations. Therefore, the best choice is option B: a decline in aggregate demand will cause the central bank to loosen monetary policy.

Inflation Targets Can Increase the Central Bank's Flexibility in Responding