Suppose the economy is producing at the natural rate of output.An open market sale of bonds by the Fed will cause ________ in real GDP in the long run and ________ in the aggregate price level 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 producing at the natural rate of output, it means that it is already producing at its full potential. An open market sale of bonds by the Fed will reduce the money supply, which will lead to a decrease in aggregate demand, causing prices to fall in the long run. However, since the economy is already at its potential output, a decrease in aggregate demand will not affect real GDP in the long run. Therefore, there will be no change in real GDP but a decrease in the aggregate price level. This is why choice D is the correct answer.

Suppose the Economy Is Producing at the Natural Rate of Output.An