The more willing monetary policymakers are to raise interest rates when faced with inflation,the ________ the AD curve is,and the ________ responsive equilibrium output is to the inflation rate.
A)steeper;more
B)steeper;less
C)flatter;more
D)flatter;less

Question

Quizplus · Accepted Answer

When monetary policymakers are willing to raise interest rates in response to inflation, it makes borrowing more expensive, which reduces consumer and investment spending. This leads to a steeper AD curve because a smaller increase in aggregate demand results in a larger rise in interest rates. Equilibrium output becomes more responsive to the inflation rate because a given level of inflation requires a larger output reduction to raise interest rates and prevent further inflation.

The More Willing Monetary Policymakers Are to Raise Interest Rates