If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil:
A) both Central Bank A and Central Bank B should increase the quantity of money.
B) Central Bank A should increase the quantity of money whereas Central Bank B should keep it stable.
C) Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it.
D) both Central Bank A and Central Bank B should keep the quantity of money stable.

Question

Quizplus · Accepted Answer

Central Bank A, focusing on price stability, would likely not alter the money supply in response to an oil price shock, aiming to avoid further inflation. Central Bank B, aiming to maintain output, might increase the money supply to counteract the negative impact on output from higher oil prices.

If Central Bank a Cares Only About Keeping the Price