If the public has correct rational expectations and the Fed reduces the level of banking reserves, it would be expected to result in:
A)a higher level of real output and a lower price level.
B)a lower price level but no change in real output.
C)a higher price level and a reduced level of real output.
D)a higher price level but no change in real output.

Question

If the public has correct rational expectations and the Fed reduces the level of banking reserves, it would be expected to result in:
A)​a higher level of real output and a lower price level.
B)​a lower price level but no change in real output.
C)​a higher price level and a reduced level of real output.
D)​a higher price level but no change in real output.

Quizplus · Accepted Answer

If the public has correct rational expectations, they would anticipate a decrease in the money supply due to the reduction in banking reserves. The decrease in the money supply would lead to a decrease in aggregate demand, which would result in a lower price level. However, there would be no change in real output, as the reduction in banking reserves would not directly affect the supply side of the economy.

If the Public Has Correct Rational Expectations and the Fed