Suppose the U.S. economy is operating at potential output. A negative supply shock that is accommodated by an open market purchase by the Federal Reserve will cause ________ in real GDP in the long run and ________ in inflation in the long run,everything else held constant.
A)no change;an increase
B)no change;a decrease
C)an increase;an increase
D)a decrease;a decrease

Question

Quizplus · Accepted Answer

A negative supply shock typically reduces output and increases prices. If the Federal Reserve accommodates this shock with an open market purchase (buying securities to inject money into the economy), it aims to offset the decrease in output by increasing the money supply. In the long run, this can lead to higher inflation due to the increased money supply, but it might not change the real GDP, which tends to return to its potential output level due to the economy's self-correcting mechanisms.