2A

Consider an economy that is initially in long-run equilibrium. Assume that the long-run aggregate supply curve is vertical at Y = 3,000 (the full employment level of output) The short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 2(M/P) and M = 1500. Suppose that a supply shock affects the economy in such a way that the price level becomes P = 2.0. By how much must the Central Bank (CB) change the money supply if it wishes to quickly restore the full employment output level? a.The CB must raise the money supply by 50%. b.The CB must lower the money supply by 50%. c.The CB must keep the money supply constant d.The CB must double the money supply.