When a central bank sets a target for the interest rate, what does it commit itself to?
A) revealing its target to the public
B) adjusting the demand for money in order to make the equilibrium in the money market hit that target
C) adjusting the money supply in order to meet the interest-rate target
D) having to make open-market sales

Question

Quizplus · Accepted Answer

When a central bank sets a target for the interest rate, it commits itself to adjusting the money supply in order to meet the interest-rate target. This means that the central bank will use open-market operations to increase or decrease the supply of money in the economy, depending on whether the interest rate is below or above its target. This is done in order to influence the demand for money and push the equilibrium interest rate towards the central bank's target.

When a Central Bank Sets a Target for the Interest