Suppose That a Central Bank Is Required to Follow a Monetary

Multiple Choice

Suppose that a central bank is required to follow a monetary policy rule to stabilize prices. If the economy starts at long-run equilibrium and then aggregate demand shifts right, what should the central bank do, and what will happen to output?

A) The central bank should increase the money supply, which causes output to move closer to its long-run equilibrium.
B) The central bank should increase the money supply, which causes output to move farther from its long-run equilibrium.
C) The central bank should decrease the money supply, which causes output to move closer to its long-run equilibrium.
D) The central bank should decrease the money supply, which causes output to move farther from its long-run equilibrium.