In the simple liquidity-preference model, the money supply curve is:
A) vertical, and it moves at the sole discretion of the Fed.
B) horizontal, and it moves at the sole discretion of the Fed.
C) vertical, and it moves when people change their rate of savings.
D) horizontal, and it moves when people change their rate of savings.

Question

Quizplus · Accepted Answer

In the simple liquidity-preference model, the money supply curve is vertical because it is controlled solely by the actions of the central bank, the Federal Reserve. The Fed can increase or decrease the money supply by buying or selling government securities, which affects the reserves of banks and their ability to lend. The rate of savings by individuals does not directly impact the money supply curve.

In the Simple Liquidity-Preference Model, the Money Supply Curve Is