Suppose That the Central Bank Must Follow a Rule That

question 91

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 supply shifts left, 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:

Quantity Supplied

The total amount of a good or service that producers are willing to sell at a given price level.

Compact Disks

Optical storage media used to store data, including music and software, now largely superseded by digital formats.

Substitute

A product or service that can be used in place of another to satisfy consumer demand.

Quantity Supplied

The amount of a good or service that producers are willing to sell at a given price over a specified period.