According to Lucas' Rational Expectations Approach, What Will Happen If

Multiple Choice

According to Lucas' rational expectations approach, what will happen if the Fed announces and implements a 4% decrease in money supply?

A) output will remain unchanged but the price level will decrease by 4% in the long run
B) both output and the price level will decrease by more than 4% in the short run and by 4% in the long run
C) output and the price level will both decrease in the short run, but only output will change by 4% in the long run
D) output will decrease by 4% and the price level will initially remain the same but will decrease by 4% as people change their expectations
E) output and the price level will both immediately decrease by 4%