Suppose the U.S.economy is operating at potential output.A negative supply shock that is accommodated by an open market purchase by the Federal Reserve will cause ________ in real GDP in the long run and ________ in the aggregate price level in the long run,everything else held constant.
A)no change; an increase
B)no change; a decrease
C)an increase; an increase
D)a decrease; a decrease

Question

Quizplus · Accepted Answer

In the long run, real GDP will return to potential output due to the economy's self-correcting mechanism. However, the open market purchase by the Federal Reserve increases the money supply, leading to higher aggregate demand and thus a higher aggregate price level.