Use the monetary policy reaction curve to link a higher inflation rate to lower aggregate demand.
What will be an ideal response?
When the inflation rate is above the target, the central bank will respond by raising the real interest rate. This is the monetary policy reaction curve. The higher interest rates will reduce the interest sensitive components of aggregate demand such as investment and interest sensitive consumption and net exports. So the higher rate of inflation leads to the lower quantity aggregate demand, this is illustrated by the aggregate demand curve.
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a. True b. False
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A. Trended down for all governments. B. Trended up for state and local governments and down for the federal government. C. Trended down for state and local governments and up for the federal government. D. Trended up for all governments.
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