Suppose the Economy Is Currently in Equilibrium, with Unemployment Equal

Multiple Choice

Suppose the economy is currently in equilibrium, with unemployment equal to the natural rate, and that people form expectations rationally. If the Federal Reserve announces that it is going to decrease the money supply, then:

A) the economy will permanently move to a higher level of output and a higher price level.
B) the economy will move to a lower price level but remain at potential GDP.
C) the economy will permanently move to a lower level of output and a lower price level.
D) the economy will move to a higher GDP level but remain at a constant price level.