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Suppose the central bank decides to reduce the reserve requirement. How will this most likely affect short-run macroeconomic equilibrium? Increase in equilibrium output/Real GDP and price level Decrease in equilibrium output/Real GDP, decrease in equilibrium price level No change in cquilibrium output/Real GDP; increase in equilibrium price level Increase in equilibrium output/Real GDP, decrease in equilibrium price level

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Final answer:

A reduction in the reserve requirement by the central bank generally leads to an increase in the supply of loanable funds, lower interest rates, and a rightward shift in aggregate demand, resulting in a short-run increase in both equilibrium output/Real GDP and potentially the price level.

Step-by-step explanation:

If the central bank decides to reduce the reserve requirement, this would effectively increase the supply of loanable funds in the economy because banks would be required to hold less money in reserve and could lend out more. This expansionary monetary policy typically leads to lower interest rates, stimulating increased borrowing and spending. In the short run, these actions would shift the aggregate demand curve to the right, leading to an increase in equilibrium output/Real GDP and potentially a higher price level, assuming that other factors remain constant. The increased economic activity would push the economy closer to its potential GDP. However, in the long run, neoclassical economists argue that the increase in aggregate demand only affects the price level and doesn't change the potential GDP, which is determined by aggregate supply.

User Alexander Hein
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Final answer:

A reduction in the reserve requirement by the central bank will increase the equilibrium output/Real GDP and may lead to an increase in the price level.

Step-by-step explanation:

A reduction in the reserve requirement by the central bank will result in an increase in the money supply because banks will have more money available to lend. This expansionary monetary policy will lead to an increase in aggregate demand (AD) and a shift to the right of the aggregate demand curve. As a result, it will increase the equilibrium output/Real GDP and may lead to an increase in the price level.

User Skywarp
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