At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, which variables will equal the central bank's target rate of inflation?
A) the current inflation rate, but not the expected inflation rate
B) the expected inflation rate, but not the current inflation rate
C) both the current and expected rates of inflation
D) neither the current nor the expected rates of inflation

Question

Quizplus · Accepted Answer

At long-run equilibrium, both the current and expected rates of inflation will be equal to the central bank's target rate of inflation. This is because, in the long run, the economy will adjust to any short-term fluctuations in aggregate demand or supply, and the price level will adjust so that the current and expected inflation rates coincide with the central bank's target.

At Long-Run Equilibrium in the Dynamic Model of Aggregate Demand