A reduction in the central bank's inflation target shifts the dynamic aggregate demand curve to the left resulting in:
A) lower current output and higher inflation.
B) higher current output and higher inflation.
C) lower current output and lower inflation.
D) higher current output and lower inflation.

Question

Quizplus · Accepted Answer

A reduction in the central bank's inflation target implies a lower level of expected inflation. This will lead to a reduction in aggregate demand as consumers and firms will reduce their spending and investment plans in response to lower expected future inflation. The leftward shift of the dynamic aggregate demand curve will result in lower current output and lower inflation.

A Reduction in the Central Bank's Inflation Target Shifts the Dynamic