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 the inflation rate in the long run, everything else held constant.

Question

Quizplus · Accepted Answer

In the long run, a decrease in consumer and business confidence can lead to a temporary reduction in spending and investment, but it does not change the economy's natural rate of output, which is determined by factors like technology, resources, and labor supply. Therefore, real GDP remains unchanged in the long run. However, the initial decrease in demand can lead to lower pressure on prices, resulting in a decrease in the inflation rate in the long run.

Suppose the Economy Is Producing at the Natural Rate of Output