In the money market, in the short run in order to decrease the nominal interest rate, the Fed must
A) increase the quantity of money.
B) increase the discount rate.
C) decrease the demand for money.
D) decrease the quantity of money.
E) directly lower the interest rate and not change either the demand for money or the supply of money.

Question

Quizplus · Accepted Answer

In the short run, to decrease the nominal interest rate, the Fed must increase the quantity of money. This would shift the supply of money curve to the right, leading to a decrease in the interest rate. This is known as an expansionary monetary policy. Increasing the discount rate, as in choice B, would have the opposite effect and increase the interest rate. Decreasing the demand for money, as in choice C, would also increase the interest rate as there would be less money available to lend. Decreasing the quantity of money, as in choice D, would also increase the interest rate by reducing the supply of money available to lend. Choice E is not a viable option as the Fed does not have direct control over the interest rate, but rather influences it through changes in the supply and demand for money.

In the Money Market, in the Short Run in Order