Should the Central Bank keep the money supply constant in response to this
regulatory change?
If the central bank does not do anything the result is a recession at the beginning. If
the Central Bank fears that the recession can be bad it can eliminate the negative
change in the AD by increasing the money supply. This is going to effective
especially if the change in the regulation is predictable. Suppose the central bank
knows when the regulation will take place (this is quite realistic) and suppose that the
Central Bank can predict well the change that this regulation will make in the velocity
of money (this is less realistic), then it can intervene at the time when the regulation