Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Bank of Canada 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

An open market purchase of bonds by the Bank of Canada injects more money into the economy, which does not affect the natural rate of output (real GDP) in the long run but tends to increase the inflation rate as more money chases the same amount of goods and services.

Suppose the Economy Is Producing at the Natural Rate of Output