Beginning at Long-Run Equilibrium in the Dynamic Model of Aggregate

question 20

Multiple Choice

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a permanent reduction in the central bank's inflation target, the DAS shifts downward because:

• A) the natural level of output increases in response to the lower rates of inflation.
• B) the deviation of output from the natural level of output increases as a result of lower rates of inflation.
• C) lower rates of inflation generate negative supply shocks.
• D) expectations of inflation decrease as a result of lower inflation in previous periods.

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