In 2008, real GDP began to fall below potential GDP. The Fed responded by cutting the federal funds rate. Use the Fed model to answer the following questions. a. How does a reduction in the federal funds rate affect the real interest rate and the output gap? The real interest rate decreases, and the output gap decreases. The real interest rate increases, and the output gap increases. The real interest rate decreases, and the output gap increases. The real interest rate increases, and the output gap decreases. b. How does the Fed's response affect inflation? Unexpected inflation decreases, and actual inflation decreases. Unexpected inflation increases, and actual inflation decreases. Unexpected inflation decreases, and actual inflation increases. Unexpected inflation increases, and actual inflation increases. c. What principle explains the relationship between the federal funds rate, the interest rate, the output gap, and inflation? opportunity cost principle marginal principle cost-benefit principle