Suppose the Economy Is Currently in Equilibrium, with Unemployment Equal

question 86

Multiple Choice

Suppose the economy is currently in equilibrium, with unemployment equal to the natural rate, and that people form expectations rationally. If the Federal Reserve announces that it is going to decrease the money supply, then:

• A) the economy will permanently move to a higher level of output and a higher price level.
• B) the economy will move to a lower price level but remain at potential GDP.
• C) the economy will permanently move to a lower level of output and a lower price level.
• D) the economy will move to a higher GDP level but remain at a constant price level.

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Definitions:

Labor Market

The marketplace where labor services are offered and demanded, determining employment levels and wage rates.

Capital Equipment

Durable goods or assets used in the production of goods or services, often involving significant investment and a long use life.

Equilibrium Rental Price

The rental price at which the quantity of a property demanded by renters equals the quantity of the property supplied by landlords.

Price of Output

The amount of money that a producer receives for selling one unit of a good or service.