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Posted 2 months ago

Which of the following best describes why the money supply curve is vertical?

Choose 1 answer:
(A) Savers want to supply more money when interest rates are high

B The central bank sets interest rates and changes the quantity of money accordingly
(C) The central bank responds to increases in the interest rate by increasing the quantity of money supplied
(D) Central banks determine the monetary base independent of the interest rate
(E) Individuals hold less money when interest rates increase
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Answer from Sia
Posted 2 months ago
Solution by Steps
step 1
To understand why the money supply curve is vertical, we need to consider the role of the central bank in controlling the money supply
step 2
The central bank has the sole authority to determine the monetary base, which includes currency in circulation and bank reserves
step 3
The money supply is not dependent on the interest rate because the central bank sets the monetary base independently of the interest rate
step 4
Options A, B, C, and E all suggest a relationship between the money supply and interest rates, which is not the case for the vertical money supply curve
step 5
Option D correctly states that central banks determine the monetary base without considering the interest rate, which explains the vertical nature of the money supply curve
Key Concept
Central bank's control over the monetary base
The money supply curve is vertical because the central bank determines the monetary base independently of the interest rate, which means the money supply is fixed regardless of changes in interest rates.

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