Based on the figure below. An economy is currently in long-run equilibrium at point B, at an inflation rate of π',which is too high for to sustain economic growth. If an anti-inflationary policy is enacted, the economy will be in short-run equilibrium at point ___ and eventually to a long-run equilibrium at point ____. A) A; B B) A; C C) B; A D) B; C

Question

Quizplus · Accepted Answer

In order for policymakers to reduce inflation, they must tighten monetary policy by shifting its policy reaction function upward, which shifts aggregate demand left. This new short-run equilibrium will exist at point A, where the economy is experiencing a recessionary gap. As a result of this recessionary gap, inflation will gradually start to decrease - shifting the SRAS line downward. When inflation has fallen enough, the economy is back in long-run equilibrium at C.

Based on the Figure Below