Assume an Economy That Is Currently at the Full-Employment Level

question 29

Multiple Choice

Assume an economy that is currently at the full-employment level of output.If aggregate demand decreases, what should we expect in the median run?

• A)a decrease in potential GDP and the price level
• B)an increase in unemployment and the price level
• C)a decrease in unemployment and the price level
• D)an increase in unemployment and a decrease in the price level
• E)a decrease in potential GDP and an increase in unemployment

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Definitions:

Depository Institutions

Financial institutions that accept deposits from individuals and provide loans, such as banks and credit unions.

Loans

Sums of money borrowed that are expected to be paid back with interest by the borrower over a specified period of time.

Discount Rate

The interest rate charged by central banks on loans they give to commercial banks and other financial institutions.

Fed

The Federal Reserve System, which is the central banking system of the United States, responsible for monetary policy.