In order for interest rates to remain stable during economic contractions, what action should monetary authorities take?
A) They should reduce the demand for money.
B) They should match the rate of growth in the money supply to the rate of growth in nominal GDP.
C) They should reduce the rate of growth in the money supply to below the rate of growth in the demand for money.
D) They should slow the growth of the money supply, or even let the money supply shrink.

Question

In order for interest rates to remain stable during economic contractions, what action should monetary authorities take?  
A) They should reduce the demand for money. 
B) They should match the rate of growth in the money supply to the rate of growth in nominal GDP. 
C) They should reduce the rate of growth in the money supply to below the rate of growth in the demand for money. 
D) They should slow the growth of the money supply, or even let the money supply shrink.

Quizplus · Accepted Answer

Monetary authorities should slow the growth of the money supply, or even let the money supply shrink, in order for interest rates to remain stable during economic contractions. This is because a decrease in the money supply will lead to an increase in interest rates, which will help to offset the decrease in demand for money that occurs during an economic contraction.

In Order for Interest Rates to Remain Stable During Economic