Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Bank of Canada will cause ________ in real GDP in the long run and ________ in the inflation rate in the long run, everything else held constant.

Question

Quizplus · Accepted Answer

An open market sale of bonds by the Bank of Canada (or any central bank) is a contractionary monetary policy action. In the long run, this would not change the natural rate of output (real GDP) because it is determined by supply-side factors like technology, resources, and labor. However, it would lead to a decrease in the inflation rate as the contractionary policy reduces the money supply, leading to lower spending and price levels.

Suppose the Economy Is Producing at the Natural Rate of Output