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

If the economy is already producing at the natural rate of output, then there is no room for an increase in real GDP. Therefore, an open market purchase of bonds by the Fed will not cause any change in real GDP in the long run. However, the increase in the money supply resulting from the open market purchase will lead to an increase in inflation in the long run, assuming everything else is held constant. Therefore, the correct answer is 'no change; an increase'.

Suppose the Economy Is Producing at the Natural Rate of Output