The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to . FIGURE 28-1
-Refer to Figure 28-1.One advantage of implementing monetary policy by targeting the interest rate as shown in part (i),rather than targeting the money supply as shown in part (ii),is that

Question

The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to  .  FIGURE 28-1
-Refer to Figure 28-1.One advantage of implementing monetary policy by targeting the interest rate as shown in part (i),rather than targeting the money supply as shown in part (ii),is that

Quizplus · Accepted Answer

Targeting the interest rate can provide more certainty for the overall change in interest rates, and thus on aggregate demand, compared to targeting the money supply. Changes in interest rates can have a stronger impact on aggregate demand than changes in the money supply. It is not necessarily easier to get political support for changes in interest rates, but it is almost impossible to change the money supply without passing new legislation. The position and slope of the money demand curve may not be known with certainty in practice.

The Diagrams Below Illustrate Two Alternative Approaches to Implementing Monetary