When the Fed conducts open market operations to decrease the monetary base,real GDP growth:
A) decreases only in the short run.
B) increases only in the short run.
C) decreases in both the short run and the long run.
D) increases in both the short run and the long run.

Question

Quizplus · Accepted Answer

When the Fed conducts open market operations to decrease the monetary base, it typically sells government securities, which leads to a decrease in bank reserves and the overall money supply. This contractionary monetary policy can lead to higher interest rates, reducing investment and spending, which can slow down economic growth in the short run. The long-term effects on real GDP growth are more ambiguous and depend on various factors, including the economy's response to inflation and adjustments in monetary policy. However, the immediate effect is generally a decrease in real GDP growth in the short run.

When the Fed Conducts Open Market Operations to Decrease the Monetary