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,the central bank must
A)increase the money supply so interest rates rise.
B)increase the money supply so interest rates fall.
C)decrease the money supply so interest rates rise.
D)decrease the moneys supply so interest rates fall

Question

Quizplus · Accepted Answer

When aggregate demand shifts right, the price level rises. According to the rule, the central bank must decrease the money supply, which will lead to higher interest rates.

Suppose That the Central Bank Must Follow a Rule That