Suppose stock prices rise.To offset the resulting change in output the Federal Reserve could
A)increase the money supply.This increase would also move the price level closer to its value before the rise in stock prices.
B)increase the money supply.However,this increase would move the price level farther from its value before the rise in stock prices.
C)decrease the money supply.This decrease would also move the price level closer to its value before the rise in stock prices.
D)decrease the money supply.However,this decrease would move the price level farther from its value before the rise in stock prices.

Question

Quizplus · Accepted Answer

Decreasing the money supply would reduce aggregate demand, counteracting the increase in output and price level caused by rising stock prices, thus moving the price level closer to its original value.

Suppose Stock Prices Rise