Suppose That a Central Bank Is Required to Follow a Monetary

question 10

Multiple Choice

Suppose that a central bank is required to follow a monetary policy rule to stabilize prices. If the economy starts at long-run equilibrium and then aggregate demand shifts right, what should the central bank do, and what will happen to output?

• A) The central bank should increase the money supply, which causes output to move closer to its long-run equilibrium.
• B) The central bank should increase the money supply, which causes output to move farther from its long-run equilibrium.
• C) The central bank should decrease the money supply, which causes output to move closer to its long-run equilibrium.
• D) The central bank should decrease the money supply, which causes output to move farther from its long-run equilibrium.

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Definitions:

Carrying Cost

The total cost of holding inventory, including storage, insurance, taxes, and opportunity costs, but not limited to these.

Restocked Inventory

Inventory items that have been replenished or added to, typically after being sold or used up.

Total Carrying Costs

The sum of all expenses associated with holding a particular investment or inventory, including storage, interest, depreciation, and insurance.

Discounted Price

A reduced price below the original mark-up, often to encourage purchase or clear inventory.