Suppose the economy is producing at the natural rate of output. A decrease 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, a decrease in consumer and business confidence can lead to a decrease in spending, which might initially reduce real GDP. However, the economy tends to adjust back to its natural rate of output due to price and wage flexibility. Therefore, real GDP would not change in the long run. However, the initial decrease in demand can lead to lower inflation in the long run, as there is less pressure on prices.

Suppose the Economy Is Producing at the Natural Rate of Output