Question

If the central bank targets a monetary​ aggregate, it is likely to lose control over the interest rate because A. of fluctuations in the consumption function. B. of fluctuations in the demand for reserves. C. bond values will tend to remain stable. D. of fluctuations in the business cycle.

Answer 1

The correct answer is B. of fluctuations in the demand for reserves.

Step-by-step explanation:

The management of the interest rate is perhaps one of the areas of economic policy that has raised the most controversy among policymakers. Much of it comes from both the interpretation of the role that the interest rate plays in macroeconomic adjustment, and the real possibility of achieving effective control over it.

Regarding the role of the interest rate, there are opposing positions about the influence that this variable may have on that of termination of savings investment. Thus, for example, from a Keynesian perspective, a weak relationship is raised between saving the interest rate, since it depends primarily on the level of income, while great importance is attached to this variable as a determinant of investment. Under this scheme, control over the interest rate can be justified since it would have the advantage of stimulating economic activity through greater investment, without significantly affecting savings levels.