Using the money demand and money supply model, show and explain why the Federal Reserve cannot achieve a target for both the money supply and an interest rate
What will be an ideal response?
The Fed does not control money demand, so it cannot achieve a target for both the money supply and an interest rate. In the graph below, the Fed could achieve an interest rate of 4 percent or a money supply of $500 billion. It appears that since the money market is in equilibrium at point A with an interest rate of 4 percent and the money supply of $500 billion that the Fed can achieve both targets. If money demand shifts, however, the Fed must choose whether to maintain the interest rate target of 4 percent or the money supply target of $500 billion.
You might also like to view...
An association of businesses that are jointly owned and operated by members for mutual benefit is a:
A) condominium. B) corporation. C) cooperative. D) joint tenancy.
In general, as individuals undertake additional years of schooling,
A) their stock of human capital increases. B) the marginal productivity of individuals as workers declines. C) the marginal benefit to society of the extra years of education increases. D) the marginal productivity of individuals as workers becomes negative.