Suppose That the Central Bank Must Follow a Rule That

question 78

Multiple Choice

Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equilibrium and aggregate demand shifts right, what must the central bank do, and what will happen to output?

• A) The central bank must decrease the money supply, which will move output back toward its long-run level.
• B) The central bank must decrease the money supply, which will move output farther from its long-run level.
• C) The central bank must increase the money supply, which will move output back toward its long-run level.
• D) The central bank must increase the money supply, which will move output farther from its long-run level.

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Definitions:

Medical Psychology

A branch of psychology that studies the biopsychosocial factors affecting health and illness, and applies psychological principles to promote health and well-being.

Behavioral Medicine

A multidisciplinary field that integrates behavioral, psychosocial, and medical knowledge to understand, prevent, and treat physical illness.

Psychobiology

A field of science that studies how biological processes influence behaviors, thoughts, and emotions.

Immune System

A complex network of cells, tissues, organs, and the substances they produce that helps the body fight infections and diseases.