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...
Facing choices between beer and pizza, the number of pizzas a consumer would be willing to trade for just one beer is called
a. the marginal value of beer in terms of pizza. b. the marginal value of pizza in terms of beer. c. the demand for beer. d. an undesirable trade.
Interest earned on foreign holdings of U.S. federal, state and local government debt are recorded in the
A) services account. B) merchandise account. C) transfers account. D) capital account.
A worldwide system of fixed exchange rates was organized and maintained under the International Monetary Fund
A) in the three decades before World War I. B) in the years between the world wars. C) from the end of World War II until the early 1970s. D) from the early 1960s to the late 1980s.
Which of the following was an attempt to reform the financial system following the 2007 recession?
a. Dodd-Frank Act b. Sarbanes-Oxley Act c. The Buffett Rule d. Boles-Simpson Plan