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 inflation 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

In the long run, an economy tends to return to its natural rate of output, meaning changes in consumer and business confidence primarily affect price levels rather than output. Thus, increased confidence can lead to higher demand, which, without a corresponding increase in supply, results in higher inflation, but the real GDP returns to its natural level.

Suppose the Economy Is Producing at the Natural Rate of Output