Suppose that the Federal Reserve votes in a new Chair of the FOMC and the moneta

Question

Suppose that the Federal Reserve votes in a new Chair of the FOMC and the monetary policy (MP) reaction function changes from Policy A to Policy B as shown in the table below:

Inflation Rate

Nominal Interest Rate

Policy Rule A

Policy Rule B

2 percent

5 percent

4 percent

4 percent

8 percent

7 percent

6 percent

11 percent

10 percent

Starting from potential output, as a result of this change in the reaction function from Policy A to Policy B, the short run impact of this change will be:

A. a rightward shift of the AD curve

B. a leftward shift of the AD curve

C. a leftward shift of the IS curve

D. a rightward shift of the IS curve

Inflation Rate

Nominal Interest Rate

Policy Rule A

Policy Rule B

2 percent

5 percent

4 percent

4 percent

8 percent

7 percent

6 percent

11 percent

10 percent

Explanation / Answer

C. a leftward shift of the IS curve

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