If the Federal Reserve sets a target nominal interest rate, it can:
A) independently set a target money supply.
B) only set a money supply target that is consistent with the target nominal interest rate target.
C) achieve this target with any arbitrary supply of money.
D) shift the money demand curve to the right.

Question

Quizplus · Accepted Answer

The Federal Reserve can only set a money supply target that is consistent with the target nominal interest rate target. This is because the money supply and interest rate are interdependent variables, and adjusting one will impact the other. Therefore, the Federal Reserve must ensure that the money supply is at a level that will achieve the desired target interest rate.

If the Federal Reserve Sets a Target Nominal Interest Rate