Explain the impact on the monetary policy reaction curve and the nominal interest rate if the level of government purchases were to decrease and the central bank does not change its inflation target?

What will be an ideal response?

The monetary policy reaction curve would shift right. A decrease in government purchases lowers the level of aggregate demand. Without a change in the target inflation rate, this means the central bank has set a lower real interest rate at every level of current inflation. This will also decrease the nominal interest rate since the real interest rate is lower and the target inflation rate has not changed.