When money demand shifts, the Fed must choose between targeting the money supply and targeting the interest rate; it cannot target both.

Question

When money demand shifts, the Fed must choose between targeting the money supply and targeting the interest rate; it cannot target both.​

Quizplus · Accepted Answer

The Federal Reserve cannot simultaneously target both the money supply and the interest rate because these two targets can be incompatible. If the demand for money shifts, maintaining a fixed money supply target could lead to fluctuations in interest rates, and vice versa. Therefore, the Fed must choose one target over the other, adjusting its tools accordingly to achieve its monetary policy objectives.

When Money Demand Shifts, the Fed Must Choose Between Targeting