To stabilize real GDP when the money demand curve shifts on its own,the Fed must change the money supply.

Question

Quizplus · Accepted Answer

When the money demand curve shifts on its own, it affects the equilibrium interest rate and can lead to a rise or fall in real GDP. To stabilize real GDP, the Fed must take action by changing the money supply to either increase or decrease the equilibrium interest rate, depending on the direction of the original shift in the money demand curve. This is because changes in the money supply directly affect the interest rates, which in turn affect borrowing, spending and investment decisions of households and firms, ultimately impacting the level of real GDP.

To Stabilize Real GDP When the Money Demand Curve Shifts