In the dynamic model of aggregate demand and aggregate supply, if the central bank chooses a large value of θ_π and a small value of θ_Y, then the DAD curve will be relatively _____, and supply shocks will have relatively _____ impacts on inflation than output. A)flat; larger B)flat; smaller C)steep; larger D)steep; smaller

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Quizplus · Accepted Answer

The DAD curve will be relatively flat because a large value of θ_π means that the central bank is more concerned with inflation than output, so it will raise interest rates more aggressively in response to inflation. A small value of θ_Y means that the central bank is less concerned with output, so it will be less likely to lower interest rates in response to a negative supply shock. As a result, supply shocks will have relatively smaller impacts on inflation than output.

In the Dynamic Model of Aggregate Demand and Aggregate Supply