If a central bank targets the interest rate, what does this imply?
A) The central bank can then set the money supply at whatever value it wants.
B) The central bank must increase the money supply if the interest rate is above its target.
C) The central bank must decrease the money supply if the interest rate is above its target.
D) The central bank must not change the money supply.

Question

Quizplus · Accepted Answer

When a central bank targets the interest rate and finds it above its target, it implies that borrowing costs are too high, which can dampen economic activity. To lower the interest rate and stimulate the economy, the central bank increases the money supply, making more funds available for lending, which in turn reduces interest rates towards the targeted level.

If a Central Bank Targets the Interest Rate, What Does