Assume that the price level is flexible both upward and downward and that the Fed's policy is to keep the price level from either rising or falling.If aggregate supply increases in the economy, the Fed
A)will have to increase interest rates to keep the price level from falling.
B)will have to reduce the money supply to keep the price level from rising.
C)will have to increase the money supply to keep the price level from falling.
D)can keep the price level stable without altering the money supply or interest rate.

Question

Quizplus · Accepted Answer

When aggregate supply increases, it tends to lower the price level. To counteract this and maintain a stable price level, the Fed would need to increase the money supply, which would increase aggregate demand and help keep the price level from falling.

Assume That the Price Level Is Flexible Both Upward and Downward