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.

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Definitions:

Gross Primary Productivity

The total amount of solar energy that photosynthetic organisms capture and convert to organic compounds in a given area over a certain period.

Nitrogen Cycle

The worldwide circulation of nitrogen from the abiotic environment into living things and back into the abiotic environment.

Carbon Cycle

The worldwide circulation of carbon from the abiotic environment into living things and back into the abiotic environment.

Photosynthetic Organisms

Organisms capable of photosynthesis, a process that converts light energy into chemical energy, typically involving the production of oxygen from carbon dioxide.