If the public has correct rational expectations and the Fed reduces both reserve requirements and the discount rate, 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 both reserve requirements and the discount rate, 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

Reducing reserve requirements and the discount rate typically increases the money supply, leading to higher price levels. With rational expectations, real output remains unchanged as people anticipate these effects.

If the Public Has Correct Rational Expectations and the Fed