Suppose that the demand and supply of money are initially in equilibrium,and that the demand for money increases.A monetary authority interested in keeping the money supply constant and the interest rate low must:
A)adopt an expansionary monetary policy.
B)adopt a contractionary monetary policy.
C)increase the demand for money.
D)decrease the demand for money.
E)give up pursuing both goals at the same time.

Question

Quizplus · Accepted Answer

If the monetary authority wants to keep the money supply constant while also keeping interest rates low, it faces a conflict. An increase in money demand would typically lead to higher interest rates if the money supply is unchanged. To keep interest rates low, the authority would need to increase the money supply, which contradicts the goal of keeping it constant. Therefore, it cannot achieve both goals simultaneously.

Suppose That the Demand and Supply of Money Are Initially