The Fed cannot predict the effects of open market operations with perfect accuracy because of
A)changes in people's desires for cash.
B)foreigners desire to hold U.S.dollars.
C)banks' desires to hold excess reserves.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

All of the above factors can influence the effectiveness of open market operations. Changes in people's desires for cash may lead to a decrease in the money multiplier, reducing the impact of the Fed's actions. Foreigners' demand for U.S. dollars can lead to changes in exchange rates, which can also affect the money supply. Banks' desires to hold excess reserves may also weaken the transmission mechanism of monetary policy by reducing the amount of loans and deposits generated by each dollar injected into the system. Hence, the Fed cannot predict with complete accuracy the effects of its policies due to these uncertain factors.

The Fed Cannot Predict the Effects of Open Market Operations