Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, if the central bank permanently reduces its inflation target, then in the initial period after the policy change, output _____, and inflation _____.
A)increases; increases
B)increases; decreases
C)decreases; decreases
D)decreases; increases

Question

Quizplus · Accepted Answer

In the initial period after the central bank reduces its inflation target, the aggregate demand curve shifts leftward, leading to a decrease in output and inflation as the economy adjusts to the new lower inflation target.

Beginning at Long-Run Equilibrium in the Dynamic Model of Aggregate