Question

Suppose Congress decided to strip the Fed of its monetary policy independence and legislate interest rate changes.

How would you expect the policy choices to​ change? Which arrangement would most likely provide price ​ stability?

The most likely result in the short run would be​ ______.

In the long​ run, the inflation rate would​ ______.

A.

an increase in money growth and falling interest​ rates;

rise and nominal interest rates would rise

B.

a decrease in money growth and rising interest​ rates;

fall and nominal interest rates would rise further

C.

an increase in money growth and falling interest​ rates;

fall and nominal interest rates would fall further

D.

a decrease in money growth and rising interest​ rates;

fall and nominal interest rates would fall

Answer 1

Price stability is most likely to remain the​ Fed's primary goal under an arrangement in which where Congress plays no role in making monetary policy decisions.

Option A

an increase in money growth and falling interest​ rates; rise and nominal interest rates would rise

In the short run when the money supply increases it means that more money is available in the economy for borrowing and this increased supply, in line with the law of demand tends to reduce the interest rates, or the price for borrowing money down. Similarly when the money supply decreases, it will tend to push up the interest rates.

The growth of the money supply determines the growth of the price level in the long run.In the long run, real output will depend on resources and technology, not the money supply.This means that changes in the price level (and therefore the rate of inflation) depend primarily on changes in the money supply.