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

question 163

Multiple Choice

Suppose that the economy is in long-run equilibrium and the government decided to engage in unexpected contractionary policy by decreasing the money supply. If we assume rational expectations, which of the following statements is correct about the effect of contractionary 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:

Dendrite

The branched projections of a neuron that act to conduct the electrochemical stimulation received from other neural cells to the body, or soma, of the neuron from which the dendrites project.

Myelin Sheath

An insulating layer around nerves, made of protein and fatty substances, which helps increase the speed at which electrical impulses propagate.

Node of Ranvier

Gaps in the myelin sheath along a nerve fiber, allowing for the rapid transmission of nerve impulses through saltatory conduction.

Summation

The process of adding multiple quantities together to achieve a total sum, often used in mathematics and physics.