Macroeconomics 1st Edition by Dean Karlan,Jonathan Morduch

Exercise 3

Suppose that a statement by the chair of the Federal Reserve Board about the state of the economy causes a loss of consumer confidence. What will be the long-run impact on the economy if the government allows the economy to adjust without a policy response?
a. Output will fall below its initial level in the long run and the price level will decline.
b. Output will return to its initial level in the long run, but the price level will be lower
c. Output will return to its initial level in the long run, but the price level will be higher
d. Output will rise above its initial level in the long run and the price level will rise.