If the economy is at potential GDP and the Fed makes an open market sale of government securities, in the long run the aggregate__________ curve shifts __________and the price level__________
A) demand; leftward; falls
B) supply; leftward; falls
C) supply; leftward; rises
D) demand; rightward; rises

Question

Quizplus · Accepted Answer

If the economy is at potential GDP, there is no output gap, and the economy is in equilibrium. An open market sale of government securities by the Fed reduces the money supply, leading to a decrease in aggregate demand. This decrease in aggregate demand causes a leftward shift of the aggregate demand curve, resulting in a decrease in output and a decrease in the price level in the long run. Therefore, the best choice is A.

If the Economy Is at Potential GDP and the Fed