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Money Supply versus Interest Rate Targets

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Assume that the economy's real GDP is growing.

a. What will happen to money demand over time?

b. If the Fed leaves the money supply unchanged, what will happen to the interest rate over time?

c. If the Fed changes the money supply to match the change in money demand, what will happen to the interest rate over time?

d. What would be effect of the policy described in part (c) on the economy's stability over the business cycle?

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(Money Supply versus Interest Rate Targets)

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