If the Fed has the goal to keep interest rates constant, the money supply should

Question

If the Fed has the goal to keep interest rates constant, the money supply should change:

a

only when the inflation rate changes.

b

in the same direction as the demand of money does.

c

only when the demand for money decreases.

d

only when investment changes.

e

in the opposite direction to a change in aggregate demand.

a

only when the inflation rate changes.

b

in the same direction as the demand of money does.

c

only when the demand for money decreases.

d

only when investment changes.

e

in the opposite direction to a change in aggregate demand.

Explanation / Answer

Option (e) is the correct answer because if Fed wants to control the inflation rates with the change in money supply, then the demand should be more for less moey supply or vice versa.

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