Suppose the Economy Is Currently in Long-Run Equilibrium, with Unemployment

question 228

Multiple Choice

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

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

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Definitions:

Disposable Income

Income that remains for saving or spending after direct taxes (such as income tax) have been deducted from an individual's earnings.

Saving

The process of setting aside a part of current earnings for future use.

Interest Rate

Interest Rate is the cost of borrowing money, typically expressed as a percentage of the amount borrowed, affecting savings, investment, and consumer spending.

Consumption Spending

The total amount of money spent by households and individuals on goods and services for personal use.