Suppose that inflation is at the target rate and output has fallen substantially below potential output. A central bank with a primary objective of price stability should ________
A) do nothing, because inflation cannot rise when unemployment is high
B) ease monetary policy, to avoid a decrease in the inflation rate
C) do nothing, because stabilizing economic activity is not a primary objective
D) ease monetary policy, because avoiding high unemployment is more important than avoiding high inflation
E) none of the above
B
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a. 1 b. 2 c. 3 d. 4
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