Assume that the price level is ﬂexible both upward and downward and that the Fed's policy is to keep the price level from either rising or falling. If aggregate supply increases in the economy, the Fed
A) will have to increase interest rates to keep the price level from falling.
B) will have to reduce the money supply to keep the price level from rising.
C) will have to increase the money supply to keep the price level from falling.
D) can keep the price level stable without altering the money supply or interest rate.

Question

Quizplus · Accepted Answer

When aggregate supply increases, it puts downward pressure on prices. To prevent the price level from falling, the Fed would need to increase the money supply, which can encourage spending and keep prices stable. This action counteracts the deflationary effect of the increased aggregate supply.

Assume That the Price Level Is ﬂExible Both Upward and Downward