EXPLAIN AND DEMONSTRATE GRAPHICALLY HOW TARGETING INTEREST RATES CA...

2) - TEST BANK CHAPTER 18 CONDUCT OF MONETARY POLICY GOALS AND TARGETS TÀI CHÍNH TIỀN TỆ
TEST BANK CHAPTER 18 CONDUCT OF MONETARY POLICY GOALS AND TARGETS TÀI CHÍNH TIỀN TỆ
2) Explain and demonstrate graphically how targeting interest rates can result in fluctuations in monetary aggregates. Answer: With an interest rate target, fluctuations in money demand require offsetting changes in the monetary base, and thus monetary aggregates, to keep the interest rate constant, as shown in the graph below. In the graph, the interest rate target is shown. Increases in money demand are matched by increases in money supply to keep the interest rate at the target. Decreases in money demand are matched by decreases in money supply to keep the interest rate at target.