If the Fed pursues a strategy of targeting an interest rate when fluctuations in money demand are prevalent
A)fluctuations of nonborrowed reserves will be small.
B)fluctuations of nonborrowed reserves will be large.
C)the Fed will probably quickly abandon this policy,as it did in the 1960s.
D)the Fed will probably quickly abandon this policy,as it did in the 1950s.

Question

Quizplus · Accepted Answer

When fluctuations in money demand are prevalent, the Fed targeting an interest rate would require significant changes in nonborrowed reserves to control the federal funds rate. Therefore, fluctuations of nonborrowed reserves will be large. This approach was abandoned in the 1970s and replaced by a focus on targeting the money supply.

If the Fed Pursues a Strategy of Targeting an Interest