According to the modern central banking theory,the central bank changes the nominal interest rate directly by changing its key policy rate,and any value of the nominal interest rate chosen by the central bank implies a specific value for
A) potential output.
B) net exports.
C) government purchases.
D) the budget deficit.
E) the money supply.

Question

Quizplus · Accepted Answer

The central bank can influence the money supply in the economy by changing its key policy rate, which affects the cost of borrowing and hence the demand for credit. Therefore, any value of the nominal interest rate chosen by the central bank implies a specific value for the money supply.

According to the Modern Central Banking Theory,the Central Bank Changes