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 conduct monetary policy consistent with a downward shift of the MP curve
B)it would conduct monetary policy that would lead to a rightward shift of the AD curve
C)after an easing of monetary policy,an eventual decrease in short-run AS would drive the long-run equilibrium level of inflation up
D)all of the above
E)none of the above

Question

Quizplus · Accepted Answer

Raising the inflation target would lead the Federal Reserve to ease monetary policy, which is consistent with a downward shift of the MP curve (making money cheaper to borrow), leading to a rightward shift of the AD curve (increasing demand). This easing of monetary policy would, in the short run, increase aggregate demand, but in the long run, it would lead to a decrease in short-run aggregate supply as costs adjust upwards, driving the long-run equilibrium level of inflation up.

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