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

Question

Quizplus · Accepted Answer

In the liquidity-preference model, the money supply curve is vertical because it is fixed by the central bank (e.g., the Fed) and does not change with the interest rate. The central bank controls the money supply independently of the interest rate.

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