If the demand for money increases and the Fed wants interest rates to remain unchanged,which of the following would be appropriate policy?

Question

Quizplus · Accepted Answer

If the demand for money increases and the Fed wants interest rates to remain unchanged, they would need to decrease the money supply. Buying bonds in the open market is an appropriate policy tool to decrease the money supply and thus, absorb the excess demand for money without changing the interest rates. Hence, option C is the best choice. Options A, B, and D would either decrease the money supply or increase interest rates, which is not the desired outcome.

If the Demand for Money Increases and the Fed Wants