Consider a scenario in which 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, what must the central bank do, and what will happen to output? The central bank must increase the money supply, which will move output farther from its long-run level. The central bank must increase the money supply, which will move output back toward its long-run level. The central bank must decrease the money supply, which will move output back toward its long-run level. The central bank must decrease the money supply, which will move output farther from its long-run level.

Consider a scenario in which 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, what must the central bank do, and what will happen to output? The central bank must increase the money supply, which will move output farther from its long-run level. The central bank must increase the money supply, which will move output back toward its long-run level. The central bank must decrease the money supply, which will move output back toward its long-run level. The central bank must decrease the money supply, which will move output farther from its long-run level.

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter22: Money Growth And Inflation

Section: Chapter Questions

Problem 1PA

See similar textbooks

Related questions

Q: Suppose the U.S. economy is initially at long run equilibrium, when there is an unexpected large…

A: Since you have posted a question with multiple parts, we will solve only the first part. To get…

Q: Distinguish between the Keynesian theory and the neoclassical theory of money demand

A: There are different types of theories of demand for money in economics as per the time period. The…

Q: Holding money demand constant, if the Fed pursues loosemoney and increase money supply, which will…

A: Loose monetary policy refers to expansionary monetary policy, which is used with the aim to increase…

Q: If the economy is able to self-correct from a negative GDP gap, why might the Fed wish to intervene…

A: A self-correcting economy refers to one that has the ability to stabilize the market without…

Q: O A. interest rates increase causing planned investment to decrease, which causes a decrease in…

A: Money Supply: - In an economy, the total value of money in circulation at a point in time is known…

Q: If a Central Bank decides it needs to decrease both the aggregate demand and the money supply, then…

A: Central bank can able to increase and decrease money supply with the help of various tools like…

Q: Suppose the U.S. economy is initially at long run equilibrium, when there is an unexpected large…

A: When the U.S economy is in long-run equilibrium and the government spending falls unexpectedly, the…

Q: Suppose the economy is initially at long run equilibrium, when there is an unexpected decrease in…

A: When an economy is in long-run equilibrium and the price of oil falls unexpectedly, the demand for…

Q: he channels through which monetary policy affects economic activity are called the ‎ * allocational…

A: (Since you have asked many questions, we will solve the first one for you. If you want any specific…

Q: The core ingredients of contractionary monetary policy are shown below. These events impact the real…

A: The contractionary money supply refers to when monetary policy raises the short-run interest rate in…

Q: Suppose government spending increases. Would the effect on aggregate demand be larger if the Federal…

A: Macroeconomics is a part of economics that deals with production, decision and allocation concerning…

Q: If the Bank of Canada conducts open-market sales, how do the money supply and the aggregate demand…

A: If the Bank of Canada conducts open-market sales, the changes in the money supply and aggregate…

Q: Suppose the Federal Reserve decreases the money stock. Create a graph that explains the effect of…

A: Monetary policy is the central bank's policy of money supply and interest rate to influence the…

Q: Suppose government spending increases. Would the effect on aggregate demand be larger if the central…

A: Meaning of Aggregate Demand: The term aggregate demand refers to the situation under which the…

Q: The phenomenon that interest rates may be so low that increases in the money supply will have no…

A: Monetary incapacitation refers to the situation when a person cannot function normally in terms of…

Q: What happens to the aggregate demand curve when the Fed reduces the money supply? a. It shifts…

A: When the Fed reduces the money supply, then it leads to higher interest rates.

Q: Explain in detail how policy rate affects aggregate demand through a monetary transmission…

A: Policy rate: - it is a monetary policy tool of the central bank of a country to control money supply…

Q: using a graph of aggregate demand and supply explain how monetary policymakers would respond to…

A: The standard objectives of monetary policy makers are to accomplish or keep up full work, to…

Q: Critically examine the money targeting policy by the central bank in aggregate demand aggregate…

A: The monetary targeting is a simple rule for monetary policy in which the central bank affects…

Q: Monetary policy affects the economy with a long lag, in part because A. proposals to change…

A: The central bank of the economy controls the monetary policy. The influence of the demand in the…

Q: The money market in the United States, the investment demand, aggregate demand, and aggregate supply…

Q: MankiwVille began the year in long-run equilibrium. The government of MankiwVille, in consultation…

A: When the credit cards are made illegal, people would try to keep more liquid money with them. This…

Q: Suppose that the central bank must follow a rule that requires it to increase the money supply when…

A: Aggregate demand refers to the total value of the goods and services that are demanded at a…

Q: Consider a hypothetical economy that produces at its long-run macroeconomic equilibrium at a price…

A: Money supply (M) in an economy is equal to the nominal GDP divided by the velocity (V), where…

Q: Determine whether the following statements are true or false:- a) With the increase of the prices…

A: a) With the increase of price, there will be an increase in demand for money. Hence the real money…

Q: If the money demand function is unstable and undergoes substantial, unpredictable changes, then the…

A: A money demand function describes the relationship between the income of the individuals, interest…

Q: Yf Identify one action the central bank can take to help the economy recover from the recession.…

A: A recession refers to a significant decline in the general level of economic activity being in a…

Q: Assume a country’s economy is currently in recession. Draw a correctly labeled graph of the…

A: When the country is in recession, the overall GDP decreases.

Q: From an initial long-run equilibrium, if aggregate demand grows more slowly than long-run and…

A: Lower growth in demand compared to supply will lead to a dip in prices. This is a situation of…

Q: Suppose the Federal Reserve (the US central bank) increases the money stock. Which of the following…

A: The increase in the money supply is mirrored by an equal increase in nominal output, or Gross…

Q: Suppose the U.S. economy is initially at long run equilibrium, when there is an unexpected economic…

A: Since you have posted a question with multiple parts, we will solve only the first part. To get…

Q: Suppose that government spending is increased at the same time when an autonomous monetary policy…

A: The aggregate supply is the total amount of services and commodities that firms in an economic plan…

Q: Which of the following statements best characterizes the Federal Reserve’s relationship to the US…

A: Central bank of a nation is the apex bank which controls and regulates the commercial banks.

Q: (23) Assume that the economy begins in long-run equilibrium and that the federal reserve decides to…

A: We are going to use the Supply and Demand mechanism related to bond market to answer this question.

Q: If the money demand function is unstable and undergoes substantial, unpredictable changes, then the…

A: Money supply does not give that much information regarding money demand function.Interest rates…

Q: Suppose the U.S. economy is initially at long run equilibrium, when there is an unexpected economic…

A: Since you have posted a question with multiple parts, we will solve only the first part. To get…

Q: When the Federal Reserve decreases the growth rate of the money supply, the income effect causes the…

A: When the reserve ratio is decreased by Federal Reserve, it would tend to lower the cash amount which…

Q: Using the aggregate demand-aggregate supply diagram, graphically illustrate and explain the impact…

A: An expansionary monetary policy increases the money supply in an economy which leads to increase in…

Q: suppose the economy suffers an adverse supply shock. if the federal reserve responds by increasing…

A: Aggregate supply represents the total goods and services that producers produce and sell in the…

Q: Suppose country A has a central bank with full credibility, and country B has a central bank with no…

Q: Suppose that the money supply and the nominal GDP for a hypothetical economy are $96 billion and…

A: Money supply : $96 billion. Nominal GDP : $336 billion.

Q: (18) Assume that the economy begins in long-run equilibrium and that the federal reserve decides to…

A: Economy in the long-run equilibrium, when federal reserve decides to use open market operation so as…

Question

Help thanks

Consider a scenario in which 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, what must the central bank do, and what will happen to output?
|The central bank must increase the money supply, which will move output farther from its long-run level.
|The central bank must increase the money supply, which will move output back toward its long-run level.
The central bank must decrease the money supply, which will move output back toward its long-run level.
The central bank must decrease the money supply, which will move output farther from its long-run level.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Recommended textbooks for you

Essentials of Economics (MindTap Course List)

Economics

ISBN:

9781337091992

Author:

N. Gregory Mankiw

Publisher:

Cengage Learning