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 increase in the price of oil:
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

Fed A, focused on price stability, would keep the money supply stable to avoid exacerbating inflation. Fed B, focused on maintaining natural output, would increase the money supply to counteract the negative impact of higher oil prices on output.

If Fed a Cares Only About Keeping the Price Level