1. Assume the economy is at full employment and the Fed restricts money supply.

Question

1. Assume the economy is at full employment and the Fed restricts money supply. What will be the effects on output and prices?
a. In the medium run output and prices will both decrease, but in the long run output will remain the same, while prices will decrease
b. Output will not be affected in the medium or long run, but prices will decrease in the long run
c. Output will decrease but only in the long run, while prices will decrease in the medium run and the long run
d. In the medium run output will remain the same, but in the long run both output and prices will decline
e. Output and prices will decline in the medium and long run

Explanation / Answer

c.

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