Exhibit 16-6 -If the Fed is targeting the money supply and the money demand shifts from D_m to D_m' in Exhibit 16-6, the Fed will A)do nothing and the interest rate will rise to i' B)do nothing and the interest rate will settle at i C)decrease the money supply to restore its target of i D)increase the money supply to restore its target of i E)decrease money demand back to D_m to restore its target of i

Question

Quizplus · Accepted Answer

If the Fed is targeting the money supply and money demand increases, the interest rate will rise as a result of the increased demand for money, assuming the Fed does nothing to change the money supply.

Exhibit 16-6 -If the Fed Is Targeting the Money Supply and the Supply