Using the federal funds rate as an operating target
A)will reduce its stability.
B)may lead to a procyclical policy.
C)will tend to reduce the inflation rate, but at the cost of higher unemployment.
D)will increase the stability of M1 and M2.

Question

Quizplus · Accepted Answer

Using the federal funds rate as an operating target may lead to a procyclical policy, meaning that monetary policy may amplify economic fluctuations instead of stabilizing them. This is because changes in the federal funds rate may have unintended effects on the economy, such as encouraging or discouraging borrowing and spending behavior during different stages of the business cycle. Additionally, there is no guarantee that using the federal funds rate as an operating target will reduce the inflation rate or increase the stability of M1 and M2, and it may result in higher unemployment as a trade-off for lower inflation.

Using the Federal Funds Rate as an Operating Target