Suppose the money demand curve shifts rightward.Which of the following is true about the alternative policy options available with the Fed?
A)The Fed can keep the interest rate from rising only if it increases the money supply.
B)The Fed cannot prevent the interest rate from rising.
C)The Fed can prevent the interest rate from rising without changing the money supply.
D)If the Fed expands the money supply,the interest rate will rise even further.
E)The Fed should reduce the money supply if it plans to prevent the interest rate from rising.

Question

Quizplus · Accepted Answer

When the money demand curve shifts rightward, it indicates an increase in the demand for money at the existing interest rate. To keep the interest rate from rising in response to this increased demand, the Federal Reserve (Fed) can increase the money supply, which shifts the money supply curve rightward, counteracting the increased demand and stabilizing the interest rate.

Suppose the Money Demand Curve Shifts Rightward