If the demand for money increases and the monetary authorities want interest rates to remain unchanged, which of the following would be appropriate policy?
A)recall currency from circulation
B)raise the desired reserves
C)buy bonds in the open market
D)raise the bank rate

Question

Quizplus · Accepted Answer

If the demand for money increases and the monetary authorities want interest rates to remain unchanged, buying bonds in the open market would be an appropriate policy. Buying bonds would inject more money into the economy, increasing the money supply, and counterbalancing the increased demand for money. This would help keep interest rates stable. The other options, recalling currency from circulation, raising desired reserves, and raising the bank rate, would all lead to decreased money supply and increased interest rates, which is not the desired outcome in this scenario.

If the Demand for Money Increases and the Monetary Authorities