Figure 28-2
-Refer to Figure 28-2. Suppose the economy is at point C. If the Fed decreases the money supply so that inflation falls, the economy will ________ in the long run, holding all else constant.

Question

Figure 28-2 
-Refer to Figure 28-2. Suppose the economy is at point C. If the Fed decreases the money supply so that inflation falls, the economy will ________ in the long run, holding all else constant.

Quizplus · Accepted Answer

When the Fed decreases the money supply, it shifts the aggregate demand curve to the left, causing a decrease in both the price level and the output level. In the long run, as prices adjust, the economy will eventually move to a lower price level and a lower natural real GDP, which is represented by point A. Therefore, the correct answer is A.

Figure 28-2 -Refer to Figure 28-2. Suppose the Economy Is at Point