Suppose That the Central Bank Must Follow a Rule That

question 91

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 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:

Trichromat

An individual who has full color vision, resulting from the normal functioning of all three types of cone cells in the retina, enabling the perception of all colors.

Color Spectrum

The range of all possible frequencies of electromagnetic radiation, visible to the human eye as different colors.

See Colors

The perceptual experience of different wavelengths of light, interpreted by the visual system as colors.

Lens Adjusts

The process by which the lens of the eye changes its shape to focus light on the retina for clear vision at various distances.