Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the long run and ________ in the inflation rate in the long run, everything else held constant.
A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease

Question

Quizplus · Accepted Answer

When the economy is producing at the natural rate of output, an increase in consumer and business confidence can lead to higher spending and investment, which initially boosts demand. However, in the long run, the economy adjusts back to its natural rate of output, meaning there's no change in real GDP. The increased demand can lead to higher prices, thus increasing the inflation rate.

Suppose the Economy Is Producing at the Natural Rate of Output