When money demand increases, the Fed cannot keep both the money supply from rising and the interest rate from rising.

Question

Quizplus · Accepted Answer

When money demand increases, the Fed cannot keep both the money supply from rising and the interest rate from rising. If the Fed tries to keep the money supply from rising, it would have to raise the interest rate to discourage borrowing and spending, which would reduce the money supply. On the other hand, if it tries to keep the interest rate from rising by increasing the money supply, it would create excess liquidity, which would lead to inflation. Therefore, there is a trade-off between the money supply and the interest rate, and the Fed has to choose one or the other.

When Money Demand Increases, the Fed Cannot Keep Both the Money