InflationPolicy Rule 1 Interest RatePolicy Rule 2 Interest Rate0132354576798911If the Fed currently is following Policy Rule 1 and then shifts to Policy Rule 2, which way will the aggregate demand curve shift?ResponsesThe aggregate demand curve will shift to the right.The aggregate demand curve will shift to the right.The aggregate demand curve will shift to the left.The aggregate demand curve will shift to the left.The aggregate demand curve will shift up.The aggregate demand curve will shift up.The aggregate demand curve will shift down.
Question
InflationPolicy Rule 1 Interest RatePolicy Rule 2 Interest Rate0132354576798911If the Fed currently is following Policy Rule 1 and then shifts to Policy Rule 2, which way will the aggregate demand curve shift?ResponsesThe aggregate demand curve will shift to the right.The aggregate demand curve will shift to the right.The aggregate demand curve will shift to the left.The aggregate demand curve will shift to the left.The aggregate demand curve will shift up.The aggregate demand curve will shift up.The aggregate demand curve will shift down.
Solution
The shift in the aggregate demand curve depends on the difference in interest rates between Policy Rule 1 and Policy Rule 2.
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If the interest rate under Policy Rule 2 is lower than under Policy Rule 1, the aggregate demand curve will shift to the right. This is because lower interest rates make borrowing cheaper, which encourages spending and investment, thus increasing aggregate demand.
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If the interest rate under Policy Rule 2 is higher than under Policy Rule 1, the aggregate demand curve will shift to the left. This is because higher interest rates make borrowing more expensive, which discourages spending and investment, thus decreasing aggregate demand.
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If the interest rate under Policy Rule 2 is the same as under Policy Rule 1, the aggregate demand curve will not shift. This is because the cost of borrowing, and thus the level of spending and investment, remains the same.
Without specific numbers for the interest rates under Policy Rule 1 and Policy Rule 2, it's impossible to say definitively which way the aggregate demand curve will shift.
Similar Questions
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