Suppose the Economy Is Initially in Long-Run and Short-Run Equilibrium

question 27

Multiple Choice

Suppose the economy is initially in long-run and short-run equilibrium. If the Fed decides to pursue a contractionary monetary policy, we will see

• A) bond prices fall, interest rates fall, aggregate demand remains unchanged as consumption spending decreases, but investment spending increases. GDP remains constant in both the short run and the long run, but the price level falls in both.
• B) bond prices fall, interest rates rise, aggregate demand falls as investment and consumption spending decrease, and real GDP and the price level decreasing in the short-run, but only the price level decreasing in the long run.
• C) bond prices fall, interest rates rise, aggregate demand falls as investment spending decreases and consumption spending remains unchanged, and real GDP and the price level decrease in the short run, but only the price level falls in the short run.
• D) interest rates rise but no change in bond prices. Aggregate demand falls as consumption spending and investment spending decrease, and the price level and real GDP fall in both the short run and the long run.

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Definitions:

Chi-Squared Test

A statistical test used to determine if there is a significant association between two categorical variables.

Nominal Variables

Variables that represent categories with no intrinsic ranking or order, such as gender, nationality, or brand names.

Degrees of Freedom

The number of values in a calculation that are free to vary without violating any constraints.

Contingency Table

A tabular method to display the frequency distribution of variables along with their joint distribution.