Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Bank of Canada will cause ________ in real GDP in the short run and ________ in the inflation rate in the short 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 sale of bonds by the Bank of Canada will decrease the money supply and increase interest rates, leading to a decrease in aggregate demand and a decrease in real GDP in the short run. This will also lead to a decrease in the inflation rate in the short run, as lower aggregate demand will put downward pressure on prices.

Suppose the Economy Is Producing at the Natural Rate of Output