If the demand for money decreases,a constant interest rate policy requires the Fed to
A) consult with leaders in the financial markets to see whether it should introduce credit controls
B) watch to see whether the investment spending decreases
C) move quickly to prevent a recession
D) decrease the supply of money
E) decrease the interest rate.

Question

Quizplus · Accepted Answer

With a decrease in demand for money, the constant interest rate policy would require the Fed to decrease the supply of money to maintain the interest rate. This is because with decreased demand, there would be an excess supply of money which would lead to a decrease in the interest rate. Thus, the Fed would need to decrease the supply of money to counteract the decrease in demand and maintain the interest rate.

If the Demand for Money Decreases,a Constant Interest Rate Policy