5. Consider an increase in economic activity (potential output) that causes the demand for money to shift outward. a. What would you expect to happen to the real interest rate and short run output if the Federal Reserve Bank targets a quantity of money supply in the economy. b. How does your answer change if the Federal Reserve Bank instead targets a nominal interest rate? How can the Federal Reserve target the interest rate instead of the money supply? C.

Brief Principles of Macroeconomics (MindTap Course List)
8th Edition
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter11: The Monetary System
Section: Chapter Questions
Problem 5CQQ
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5. Consider an increase in economic activity (potential output) that causes the demand for money
to shift outward.
a. What would you expect to happen to the real interest rate and short run output if the
Federal Reserve Bank targets a quantity of money supply in the economy.
b. How does your answer change if the Federal Reserve Bank instead targets a nominal
interest rate?
How can the Federal Reserve target the interest rate instead of the money supply?
C.
Transcribed Image Text:5. Consider an increase in economic activity (potential output) that causes the demand for money to shift outward. a. What would you expect to happen to the real interest rate and short run output if the Federal Reserve Bank targets a quantity of money supply in the economy. b. How does your answer change if the Federal Reserve Bank instead targets a nominal interest rate? How can the Federal Reserve target the interest rate instead of the money supply? C.
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