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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

The Federal Reserve’s target rate for the federal funds rate

a. is an extra policy tool for the central bank, in addition to and independent of the money supply.

b. commits the Fed to set a particular money supply so that it hits the announced target.

c. is a goal that is rarely achieved, because the Fed can determine only the money supply.

d. matters to banks that borrow and lend federal funds but does not influence aggregate demand.

To determine

Role of interest rate targets in Fed policy.

Explanation

Option (b):

When the Fed sets a target for the federal funds rate, it commits itself to adjust the money supply to make the equilibrium in the money market to hit that target. Thus, option ‘b’ is correct.

Option (a):

Deliberations of Fed policy often treat the interest rate as the Fed's policy instrument rather than the money supply. Thus, option ‘a’ is incorrect.

Option (c):

The Fed can affect the aggregate demand with any change in the money supply by targeting the interest rate...

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