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 decrease in the velocity of money:
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

An exogenous decrease in the velocity of money would lead to a decrease in the price level and output. To counteract this and maintain their respective goals (price level stability for Central Bank A and natural level of output for Central Bank B), both would need to increase the quantity of money to offset the decrease in velocity.

If Central Bank a Cares Only About Keeping the Price