Under which policy regime is GDP most insulated from random shifts in the LM curve?
A) A monetary policy targeted at a constant interest rate with checking accounts paying no interest
B) A monetary policy targeted at a constant monetary base with checking accounts paying no interest
C) A monetary policy targeted at a constant interest rate with checking accounts paying competitive interest rates
D) A monetary policy targeted at a constant money supply with checking accounts paying competitive interest rates
E) Either a or c regardless of economic conditions

Question

Quizplus · Accepted Answer

When a central bank targets a constant interest rate, it adjusts the money supply as needed to keep the interest rate fixed, even if the LM curve shifts. This action helps to insulate GDP from those shifts. Whether checking accounts pay interest or not does not affect this basic mechanism of monetary policy aimed at stabilizing interest rates.

Under Which Policy Regime Is GDP Most Insulated from Random