Question

In: Finance

A tightening of Federal Reserve monetary policy occurs when the Federal Reserve ______ its target inflation...

A tightening of Federal Reserve monetary policy occurs when the Federal Reserve ______ its target inflation rate, which _____.

A. decreases; shifts the aggregate demand curve to the right

B. decreases; shifts the aggregate demand curve to the left

C. decreases; results in a movement up the aggregate demand curve

D. increases; shifts the aggregate demand curve to the left

Solutions

Expert Solution

The answer is B,

Reason: the monetary policy is tightened by decreasing it's inflation rate. Because increasing the inflation causes the prices of goods to rise, which in turn there will be increase in interest rate to reduce the money supply in our economy. To put in other way, increasing interest rate will make borrowing money costlier and so availability of money reduces to buy goods, and so inflation is brought under control. If this is not brought under control, then the currency value drops in the economy when compared to other country.

When the inflation rate is brought down by increasing the interest rate, money supply reduces and demand also reduces and moves to left.

jeff jeffy answered 2 years ago
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