Given an upward-sloping aggregate supply curve,which of the following is most likely to occur if the Fed sells bonds in the open market,ceteris paribus?
A) Greater inflation and more unemployment.
B) Greater inflation and less unemployment.
C) Lower average prices and less unemployment.
D) Lower average prices and more unemployment.

Question

Quizplus · Accepted Answer

When the Fed sells bonds in the open market, it increases the interest rate which, in turn, decreases investment and households' consumption. This decreases the aggregate demand, which shifts leftward. As a result, the equilibrium output and employment decrease. Furthermore, since the aggregate supply curve is upward sloping, lower output leads to lower levels of average prices. Therefore, D (Lower average prices and more unemployment) is the correct answer.

Given an Upward-Sloping Aggregate Supply Curve,which of the Following Is