If the economy is in a long-run equilibrium when the Federal Reserve decides that its inflation target is too low and chooses to raise it,________.
A)it would likely conduct a tightening of monetary policy by raising the real interest rate for any given inflation rate
B)it would likely conduct an easing of monetary policy by lowering the real interest rate for any given inflation rate
C)it would likely conduct an easing of monetary policy where the real interest rate would increase due to the ensuing decrease in aggregate demand
D)it would likely conduct a tightening of monetary policy where the real interest rate would increase due to the ensuing increase in aggregate demand
E)none of the above

Question

Quizplus · Accepted Answer

If the Federal Reserve decides to raise its inflation target, it is indicating that it wants to increase inflation from its current level. To do this, the Federal Reserve would likely conduct an easing of monetary policy by lowering the real interest rate for any given inflation rate. Lowering the real interest rate would increase aggregate demand and stimulate economic growth, which would lead to a higher level of inflation.

If the Economy Is in a Long-Run Equilibrium When the Federal