Suppose the Central Bank Lowers Its Target Inflation Rate from 3

question 114

Essay

Suppose the central bank lowers its target inflation rate from 3 percent to 1.5 percent. Use the aggregate demand/inflation curve and the price adjustment line to show the short-run, medium-run, and long-run effects of this policy change. Assume the economy is initially at the point of long-run equilibrium.

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Definitions:

Marginal Benefit

The additional satisfaction or utility that a person receives from consuming an additional unit of a good or service.

Marginal Cost

The increase in cost that arises from producing an additional unit of a good or service.

Marginal

Incremental, additional, or extra; used to describe a change in an economic variable.

Incremental

Describes small, gradual changes or increases made over a period of time.