Suppose the Fed is targeting real GDP.If the interest rate is below its forecast and the Fed is convinced that this is due to commodity demand instability,it will ________ the money supply,which turns out to be exactly the wrong thing to do if the low interest rate is in fact due to ________ money demand.

Question

Quizplus · Accepted Answer

If the Fed believes the low interest rate is due to commodity demand instability, it might raise the money supply to stimulate the economy. However, if the real cause of the low interest rate is actually low money demand, increasing the money supply could exacerbate the situation by adding more liquidity into an economy where the demand for money is already low, potentially leading to inflationary pressures.

Suppose the Fed Is Targeting Real GDP