Suppose the Economy Has Been at Full Employment for the Past

Multiple Choice

Suppose the economy has been at full employment for the past two years with a 7 percent inflation rate, and both the money supply and money demand were growing at 7 percent a year. If the Federal Reserve unexpectedly decreases the rate of money growth to 3 percent, the following sequence of events occurs

A) real interest rates fall, investment spending decreases, GDP increases, unemployment falls, and prices rise.
B) real interest rates rise, investment spending decreases, GDP decreases, unemployment increases, and prices fall.
C) real interest rates fall, investment spending increases, GDP increases, unemployment falls, and prices rise.
D) real interest rates rise, investment spending increases, GDP decreases, unemployment increases, and prices fall.