Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Fed will cause ________ in real GDP in the short run and ________ in inflation 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 Fed will decrease the money supply, leading to an increase in interest rates and a decrease in investment and consumption. This will cause a decrease in real GDP in the short run. Additionally, the decrease in demand without a corresponding decrease in supply will cause a decrease in prices or deflation, leading to a decrease in inflation in the short run. Therefore, choice B is the correct answer.

Suppose the Economy Is Producing at the Natural Rate of Output