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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