True or false: In the AD-AS model, a permanent reduction in the inflation target will cause the economy to experience a temporary boom followed by a gradual decline in the output gap and inflation rate until the new steady state is reached.

Answer 1

False. In the AD-AS model, a permanent reduction in the inflation target would lead to a temporary decrease in output and a temporary increase in unemployment as the economy adjusts to the new lower inflation rate. Over time, the economy would gradually return to its new long-run equilibrium.