If the public has rational expectations and the Fed reduces both reserve requirements and the discount rate, this would result in:
A)a higher level of real output and a lower price level in the long run.
B)a lower price level but no change in real output in the long run.
C)a higher price level and a reduced level of real output in the short run.
D)a higher price level but no change in real output in the short run.
E)a higher level of real output and a lower price level in the short run.

Question

Quizplus · Accepted Answer

When the Federal Reserve reduces both reserve requirements and the discount rate, it effectively increases the money supply. In the short run, this can lead to a higher price level due to inflationary pressures. However, because of rational expectations, people anticipate the inflation, leading to no change in real output as they adjust their behavior accordingly.

If the Public Has Rational Expectations and the Fed Reduces