Suppose That the Central Bank Must Follow a Rule That

question 39

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 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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