Suppose that the economy is in long-run equilibrium and the government decided to engage in unexpected contractionary policy by decreasing the money supply. If we assume rational expectations, which of the following statements is correct about the effect of contractionary policy in the long run?
A. The unemployment rate will increase, real Gross Domestic Product (GDP) will increase and the price level will increase.
B. The unemployment rate will decrease, real Gross Domestic Product (GDP) will decrease and the price level will decrease.
C. The unemployment rate will remain unchanged, real Gross Domestic Product (GDP) will remain unchanged and the price level will increase.
D. The unemployment rate will remain unchanged, real Gross Domestic Product (GDP) will remain unchanged and the price level will decrease.
Answer: D
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