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.

---

Definitions:

Genetic Predispositions

The genetic makeup that makes an individual more likely to develop certain traits or diseases.

Environmental Factors

Aspects of the surroundings, both natural and man-made, that can influence living organisms and ecosystems.

Narcissistic Personality Disorder

A mental disorder characterized by an inflated sense of importance, need for excessive attention, and lack of empathy for others.

Ego

According to Freud, the decision-making component of personality that operates according to the reality principle.