If Fed A cares only about keeping the price level stable and Fed B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money:
A)both Fed A and Fed B should increase the quantity of money.
B)Fed A should increase the quantity of money whereas Fed B should keep it stable.
C)Fed A should keep the quantity of money stable whereas Fed B should increase it.
D)both Fed A and Fed B should keep the quantity of money stable.

Question

Quizplus · Accepted Answer

An exogenous decrease in the velocity of money reduces aggregate demand, which can lead to lower prices and output. To stabilize prices, Fed A should increase the money supply. To maintain output at its natural level, Fed B should also increase the money supply.

If Fed a Cares Only About Keeping the Price Level