Assume a central bank follows a rule that requires it to take steps to keep the price level constant.If the price level fell because of a decrease in aggregate demand and an increase 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.

Question

Quizplus · Accepted Answer

If the price level fell due to a decrease in aggregate demand and an increase in aggregate supply while output remained unchanged, this indicates an excess supply of goods in the market. To keep the price level constant, the central bank would need to increase the money supply to increase aggregate demand and bring the market back to equilibrium. This would lead to an increase in output as firms increase production to meet the increased demand. Therefore, the correct choice is D.

Assume a Central Bank Follows a Rule That Requires It