Question

Some members of Congress have proposed a law that would make price stability the sole goal of monetary policy. Suppose such a law were passed. (a) How would the Fed respond to an event that expanded aggregate demand

Answer 1

If aggregate demand expands, unless aggregate supply expands in an equal proportion, then the price level will increase. In order to keep prices stable, the FED would need to increase interest rates or decrease the money supply in order to offset the expansion of the aggregate demand. This way, aggregate demand should return to its original level.

Step-by-step explanation: