If higher inflation ensues from a temporary negative supply shock, and in response, the central bank raises interest rates, then the resulting decrease in AD will return inflation back to its original level ________.
A) and no further action will be required by the central bank
B) but the ensuing positive output gap will lead to higher inflation once again so further interest rate increases will be required by the central bank to return inflation back to its long run level
C) but the ensuing negative output gap will lead to short-run increases in AS and the central bank will have to undo its original interest rate hike in order to return inflation back to its target rate
D) all of the above
E) none of the above
Question 2
A 10 million open market sale will decrease the monetary base by
A) 10 million.
B) 10 million times the money multiplier.
C) 10 million divided by the money multiplier.
D) an amount between 0 and 10 million, depending on the fraction of the purchase the public wishes to hold as currency.
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