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Suppose the policy reaction function for the RBA is given by r=¯r+gπr=r¯+gπ

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Suppose the policy reaction function for the RBA is given by r=¯r+gπr=r¯+gπ. If the RBA increased the value of the parameter gg, which of the following would occur?

A. The slope of the AS curve would become flatter (i.e. closer to horizontal).

B. The slope of the AD curve would become flatter (i.e. closer to horizontal).

C. The AS curve would shift inwards (to the left).

D. The AD curve would shift inwards (to the left).

E. Both A and C.

Option 1

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