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.

Question

Quizplus · Accepted Answer

If the price level is rising due to an increase in aggregate demand and a decrease in aggregate supply, then the central bank would have to decrease the money supply to keep the price level constant. This would mean that there is less money available for spending, which would decrease aggregate demand and output.

Assume a Central Bank Follows a Rule That Requires It