Question

For more than 20 years, the Fed has used the federal funds rate as its monetary policy target. It has not targeted money supply at the same time because the
A. Fed does not have the authority to control both targets
B. Fed cannot target both at the same time: it has to choose between targeting an interest rate and targeting the money supply
C. Fed can target both at the same time, but it has chosen to target the interest rate as it is more reliable as a target

Answer 1

Option B

For more than 20 years, the Fed has used the federal funds rate as its monetary policy target. It has not targeted money supply at the same time because the Fed cannot target both at the same time: it has to choose between targeting an interest rate and targeting the money supply

Explanation:

Every economic aspect important for the economy and not directly controlled by the Federal Reserve is subject to intermediate goals. For example, things like money supply or inflation are included. Although these goals form part of the monetary policy priorities of the banking system, the Fed's monetary policy actions only affect them indirectly. Intermediate priorities help guide decisions between the specific instruments of the Fed and its aims.

The Fed can not actually control an intermediate objective including the supply of money, and must, therefore, influence the intermediate objective by means of one of its policy instruments, the discount rate, in this case.