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Which of the following is not a viable monetary policy target for the Fed?

a. The inflation rate

b. The interest rate

c. The money supply

d. The money demand

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Irving Heathcote
Irving HeathcoteLv2
9 Mar 2020

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Related questions

Under what economic conditions would the Fed wish to increase (expansionary policy) or decrease (contractionary policy) the money supply? How would an increase in the money supply likely affect interest rates, investment, aggregate demand, the price level, output, and employment? Why might monetary policy fail? What does inflation targetingmean?

In this section of the course, the formulation and implementation of monetary policy are discussed. One of the main issues of monetary policy is that of the appropriate target and indicator of monetary policy. There are two main targets of monetary policy I want you to concern yourself with the interest rate target and the inflation target. The Federal Reserve has been targeting interest rates, most notably the federal funds rate, to guide monetary policy. However, many believe the Fed should target inflation. What target do you think the Fed should aim at interest rates or inflation rates? Please explain why.

1. Those who advocate that the Fed target monetary aggregates, usually argue that the Fed should not alter its monetary targets in response to temporary changes in macroeconomic conditions, yet those who advocate interest rate targeting never recommend that the Fed maintain a constant federal funds rate target. Why not? (What's the potential danger of maintaining a rigid interest rate target?)

2. If excessively rapid growth in the money supply is associated with all inflationary episodes, why do central banks ever allow the money supply to increase so rapidly?

 

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