Suppose That the Central Bank Must Follow a Rule That

question 92

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 towards 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 towards 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:

Significance Level

A threshold in hypothesis testing that determines whether a result is statistically significant; often denoted by alpha (α).

Partitioning

The process of allocating the total sum of squares and degrees of freedom to the various components.

Sum of Squares

A statistical technique used to describe the total variation or dispersion of a set of values around the mean; used in various analyses, including variance and regression.

Mean Square

The mean square is a statistical measure used in ANOVA and regression analysis, calculated as the sum of squared deviations from the mean divided by the degrees of freedom.