Assume Output Is at Its Full-Employment Level and the Fed

question 8

Multiple Choice

Assume output is at its full-employment level and the Fed restricts money supply.What is the most likely outcome?

• A)an immediate decrease in prices, with no impact on output
• B)no change in nominal wages in the short run, but a decline in output and prices in the medium run
• C)no change in real wages, but a decline in output and prices in the medium run
• D)a decrease in nominal wages and prices in proportion to money supply, but no change in output and real interest rates in the long run
• E)both B and D

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Definitions:

Legitimate Power

A type of power that is recognized and accepted by the society or organization in which it operates, often derived from a formal position or role.

Tacit Power

Unspoken, yet understood authority or influence that individuals or groups may hold, often derived from social positions or relationships.

Legal-Rational Authority

Is typical of modern societies. It derives from respect for the law. Laws specify how a person can achieve office. People generally believe laws are rational. If someone achieves office by following laws, people respect his or her authority.

Pierre Elliott Trudeau

A former Prime Minister of Canada known for his charismatic leadership, implementation of the Official Languages Act, and promotion of Canadian unity.