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.