Based on the Figure Below, the Economy Is Initially at Point

question 21

Multiple Choice

Based on the figure below, the economy is initially at point A on the monetary policy reaction function (RF₁) and the aggregate demand curve (AD₁) . The actual rate of inflation is $\pi$ ' and the Federal Reserve's target inflation rate is $\pi$ *₁. If the Federal Reserve raises its target inflation rate to $\pi$ *₃, then the Federal Reserve's monetary policy reaction function will _____ and the aggregate demand curve will _____.

• A) shift to RF₃; shift to AD₂
• B) shift to RF₂; shift to AD₂
• C) shift to RF₃: shift to AD₃
• D) shift to RF₂: shift to AD₃

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Definitions:

Network Externalities

The effect that one user of a product or service has on the value of that product to other people, often positive, where the value increases as more people use it.

Profit-maximizing

The process or strategy of adjusting production and sale levels to achieve the highest possible profit.

Communications Network

A system of interconnected digital or analog devices and channels used for the purpose of exchanging information.

Willingness to Pay

The maximum amount an individual is ready to sacrifice to acquire a good or service or to avoid something undesirable.