Exhibit 15-6
-If the Federal Reserve is targeting the interest rate when the demand for money increases,their proper response is to
A)decrease the money supply
B)keep the money supply constant
C)increase the money supply
D)stimulate inflation to increase the demand for money
E)stimulate a decrease in the price level to increase the demand for money

Question

Exhibit 15-6 
-If the Federal Reserve is targeting the interest rate when the demand for money increases,their proper response is to
A)decrease the money supply 
B)keep the money supply constant 
C)increase the money supply 
D)stimulate inflation to increase the demand for money 
E)stimulate a decrease in the price level to increase the demand for money

Quizplus · Accepted Answer

When the demand for money increases, the Fed should increase the money supply to keep the interest rate stable as per their target. This will ensure that the cost of borrowing remains constant and does not increase due to higher demand for money. Hence, the proper response would be to increase the money supply.

Exhibit 15-6 -If the Federal Reserve Is Targeting the Interest Rate When