If money demand changes for some reason other than a spending shock,the Fed can stabilize
A) GDP without changing the interest rate
B) GDP,but at the expense of interest rate stability
C) GDP by keeping the interest rate stable
D) the price level by keeping the interest rate stable
E) the price level and GDP by stabilizing the interest rate

Question

Quizplus · Accepted Answer

If the money demand changes due to factors other than a spending shock, such as changes in technology or business investment, the Fed can stabilize GDP by keeping the interest rate stable. This is done through Open Market Operations, where the Fed buys or sells government securities, adjusting the supply of money in the economy to match the current demand. By keeping the interest rate stable, the Fed can also indirectly stabilize the price level, as changes in interest rates can affect spending and inflation.

If Money Demand Changes for Some Reason Other Than a Spending