Assume a Central Bank Follows a Rule That Requires It

question 23

Multiple Choice

Assume a central bank follows a rule that requires it to take steps to keep the price level constant.If the price level rose because of an increase in aggregate demand and a decrease in aggregate supply that kept output unchanged,then

• A)the central bank would have to decrease the money supply which would decrease output.
• B)the central bank would have to decrease the money supply which would increase output.
• C)the central bank would have to increase the money supply which would decrease output.
• D)the central bank would have to increase the money supply which would increase output.

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Definitions:

Profit-maximizing Output

The level of production at which a firm achieves the highest profit, where marginal revenue equals marginal cost.

Marginal Cost

The expenditure required to produce an extra unit of a good or service.

Fixed Cost

A cost that does not change with an increase or decrease in the amount of goods or services produced.

Lawn-mowing

The process of cutting the grass in a lawn to maintain its appearance and health.