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)decrease the money supply,which will move output back towards its long-run level.
B)decrease the money supply,which will move output farther from its long-run level.
C)increase the money supply,which will move output back towards its long-run level.
D)increase the money supply,which will move output farther from its long-run level.

Question

Quizplus · Accepted Answer

Following the given rule, if the aggregate demand shifts right and the price level rises, the central bank must decrease the money supply. This will decrease spending in the economy, causing output to move back towards its long-run level. Thus, choice A is the correct answer.

Suppose That the Central Bank Must Follow a Rule That