If Fed a Cares Only About Keeping the Price Level

question 8

Multiple Choice

If Fed A cares only about keeping the price level stable and Fed B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil:

• A)both Fed A and Fed B should increase the quantity of money.
• B)Fed A should increase the quantity of money whereas Fed B should keep it stable.
• C)Fed A should keep the quantity of money stable whereas Fed B should increase it.
• D)both Fed A and Fed B should keep the quantity of money stable.

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Definitions:

Efficient Scale

The level of production at which a firm's average total costs are minimized.

Monopolistically Competitive

A market structure where many sellers offer products or services that are similar but not perfect substitutes, allowing for some degree of market power.

Product-variety Externality

The impact on consumer welfare or market efficiency due to variety in products available, often seen as a positive externality in markets.

Business-stealing Externality

A negative effect where a new entrant in a market draws customers from existing businesses, potentially harming those businesses without creating new value for the market as a whole.