17. Suppose that the central bank must follow a rule that requires it to increase the money supply when the price level falls and decrease the money supply when the price level rises. If the economy starts from long-run equilibrium and aggregate demand shifts right, the central bank must

a. decrease the money supply, which shifts aggregate demand further right. b. decrease the money supply, which shifts aggregate demand left. c. increase the money supply, which shifts aggregate demand further right. d. increase the money supply, which shifts aggregate demand left.

18. If a central bank were required to target inflation at zero, then when there was a negative aggregate supply shock the central bank

a. would have to increase the money supply. This would move unemployment closer to the natural rate. b. would have to increase the money supply. This would move unemployment further from the natural rate. c. would have to decrease the money supply. This would move unemployment closer to the natural rate. d. would have to decrease the money supply. This would move unemployment further from the natural rate.

19. Which of the following could the government do to decrease the costs of inflation without lowering the inflation rate?

a. Avoid unexpected changes in the inflation rate. b. Rewrite the tax laws so that nominal gains were taxed instead of real gains. c. Make policy that would discourage firms from issuing indexed bonds. d. All of the above are correct.

20. Demand for workers in some industry declines. These workers are reluctant to have a cut in their nominal wage. However,

a. inflation will raise their real wage and so increase the number of available workers. b. inflation will raise their real wage and so decrease the number of available workers c. inflation will reduce their real wage and so increase the number of available workers. d. inflation will reduce their real wage and so decrease the number of available workers