How does the Fed decide which monetary measure should be the focus of its monetary policy choices?
A) The Fed would like to track a monetary measure that is most closely related to the market interest rate.
B) The Fed would like to track a monetary measure that is most closely related to the quantity of money demanded by economic agents.
C) The Fed would like to track a monetary measure that is most closely related to the level of real GDP and the price level.
D) The Fed would like to track a monetary measure that is most closely related to government spending.

Question

Quizplus · Accepted Answer

The primary goal of monetary policy is to achieve price stability and maximum employment. Therefore, the Fed would like to track a monetary measure that is most closely related to the level of real GDP and the price level, such as M2 or the monetary base. These measures can provide information on aggregate demand and the money supply, which can indicate whether the economy is expanding or contracting, and whether inflationary or deflationary pressures are building up in the economy. Thus, focusing on such measures allows the Fed to make informed decisions on its monetary policy choices.

How Does the Fed Decide Which Monetary Measure Should Be