Suppose That the Central Bank Must Follow a Rule That

question 7

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,the central bank must

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

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Definitions:

Efficiency Wage

A theory suggesting that higher wages may increase worker productivity and efficiency by attracting better applicants, reducing turnover, and increasing worker morale.

Contract Curve

Curve showing all efficient allocations of goods between two consumers, or of two inputs between two production functions.

Utility Possibilities Frontier

Curve showing all efficient allocations of resources measured in terms of the utility levels of two individuals.

Production Possibilities Frontier

Curve showing the combinations of two goods that can be produced with fixed quantities of inputs.