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:

Doctrine of Subordination

A principle in law that allows a lower priority claim on assets or income to be elevated above others, often used in debt agreements.

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Creditors who have provided loans or credit without taking collateral. If the borrower defaults, they have no special claim to any specific asset of the borrower.

Debts Paid

The act of fulfilling obligations by paying off owed money.

Bankruptcy Court

A federal court that handles legal proceedings related to bankruptcy filings, allowing individuals or entities to settle debts under the protection of the law.