If the Federal Reserve targets the interest rate and the money demand curve shifts to the left,then the Fed
A)cannot maintain the interest rate target.
B)can maintain the interest rate target,but at a lower quantity of the money supply.
C)can maintain the interest rate target,but at a higher quantity of the money supply.
D)can maintain the interest rate target with no change in the money supply.

Question

Quizplus · Accepted Answer

If the money demand curve shifts to the left, it means people are willing to hold less money at a given interest rate. In order to maintain the interest rate target, the Fed will have to reduce the quantity of money supply. Therefore, B is the correct option. Option A is incorrect because the Fed can still maintain the interest rate target, just at a different level of the money supply. Option C is incorrect because the Fed will have to reduce the quantity of money supply, not increase it. Option D is incorrect because if the money demand curve shifts to the left, the Fed will have to adjust the money supply to maintain the interest rate target.

If the Federal Reserve Targets the Interest Rate and the Money