The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to . FIGURE 28-1 Refer to Figure 28-1.One advantage of implementing monetary policy by targeting the interest rate as shown in part (i),rather than targeting the money supply as shown in part (ii),is that

Question

The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to  .  FIGURE 28-1 Refer to Figure 28-1.One advantage of implementing monetary policy by targeting the interest rate as shown in part (i),rather than targeting the money supply as shown in part (ii),is that

Quizplus · Accepted Answer

Targeting the interest rate provides more certainty in the overall change in interest rates and its impact on aggregate demand compared to targeting the money supply. This is because changes in the money supply may not have predictable effects on interest rates and aggregate demand due to uncertainties in the demand for money. Additionally, it may be easier to get political support for changes in interest rates compared to changes in the money supply.

The Diagrams Below Illustrate Two Alternative Approaches to Implementing Monetary