Suppose That the Economy Is in Long-Run Equilibrium and the Central

question 165

Multiple Choice

Suppose that the economy is in long-run equilibrium and the central bank decided to engage in unexpected expansionary policy by increasing the money supply. If we assume rational expectations, which of the following statements is correct about the effect of expansionary policy in the long run?

• A) The unemployment rate will increase, real GDP will increase and the price level will increase.
• B) The unemployment rate will decrease, real GDP will decrease and the price level will decrease.
• C) The unemployment rate will remain unchanged, real GDP will remain unchanged and the price level will increase.
• D) The unemployment rate will remain unchanged, real GDP will remain unchanged and the price level will decrease.

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Definitions:

Tyranny of the Majority

A situation in a democratic setting where the majority's interests or decisions oppress the minority.

Minority Groups

Social groups that are differentiated from the majority in a society by cultural, ethnic, racial, religious, or linguistic characteristics.

International Laws

A body of rules established by treaty or custom that governs the relations between nations.

Legislatures

Elected bodies of government responsible for enacting laws, approving budgets, and representing the interests of the public.