Assuming a decrease in money demand,then to keep interest rates constant the Fed must

Question

Quizplus · Accepted Answer

If there is a decrease in money demand, the Fed needs to conduct an open market sale of bonds to decrease the money supply and keep interest rates constant. This is because if the money supply remains constant while the demand for money decreases, there will be an excess supply of money, which will lead to a decrease in interest rates. Similarly, if the Fed accommodates the decreased demand for money by increasing the money supply, it will lead to inflation and a decrease in the value of money. Therefore, the best option is for the Fed to conduct an open market sale of bonds to maintain interest rates constant.

Assuming a Decrease in Money Demand,then to Keep Interest Rates