The Fed responds to money demand shocks by
A) changing the velocity of money
B) changing the money supply
C) following the money creation rules responsible for its success in the past two decades
D) increasing the required reserve ratio
E) changing its definition of the natural rate of unemployment

Question

Quizplus · Accepted Answer

The Fed typically responds to money demand shocks by changing the money supply. If there is an increase in money demand, the Fed can increase the money supply to meet the demand. If there is a decrease in money demand, the Fed can decrease the money supply to reduce any excess money in the market. By adjusting the money supply, the Fed aims to stabilize prices and maintain economic growth.

The Fed Responds to Money Demand Shocks by