If the Fed decreases the money supply, interest rates rise. What’s new is what happens when money demand changes: if GDP rises and thus money demand shifts to the right (increases) then interest rates will rise (See figure 23.8). Ok, but but but . . . is the Fed setting the money supply and letting interest rates move to wherever they need to in order to equate money demand and money supply Such as in the second half of Chapter 23? Or is the Fed setting the interest rate, so that when the money demand rises the Fed responds by increasing the money supply because they don’t want the interest rate to change just because of fluctuations in money demand?
Money supply and demand
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