The Diagrams Below Illustrate Two Alternative Approaches to Implementing Monetary

question 57

Multiple Choice

The diagrams below illustrate two alternative approaches to implementing monetary policy.The economy begins in monetary equilibrium with the interest rate equal to 2% and the money supply equal to . FIGURE 28-1
-Refer to Figure 28-1.If the Bank of Canada's goal is to increase the target interest rate from 2% to 3%,then the most effective approach is to

• A)reduce the money supply to ,as shown in part (ii),and then let the interest rate adjust to 3%.
• B)increase the money supply to ,as shown in part (ii),and then let the interest rate adjust to 3%.
• C)allow the money supply to shift to by market forces,which will cause the interest rate to rise to 3%.
• D)raise the interest rate to 3%,as shown in part (i),and then buy government securities in financial markets to accommodate the decline in the quantity of money demanded.
• E)raise the interest rate to 3%,as shown in part (i),and then sell government securities in financial markets to accommodate the decline in the quantity of money demanded.

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