An economy is currently operating at full employment. If the Fed unexpectedly decreases the reserve requirement, in the short run, the aggregate output will
________. The unemployment will ________ the natural rate.
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A. B. C. D.B
The unexpected decrease in the reserve requirement causes an unexpected expansion in money supply. In the short run, this leads to lower real interest rates.
The increased availability of credit coupled with the rise in demand leads to an increase in real output and employment. Temporarily, the unemployment rate falls below the natural rate.