If money demand is unstable, the Fed may prefer to target interest rates rather than the money supply itself. When the Fed follows an interest-rate-targeting policy, “Fed watchers” in financial markets and the media typically look to changes in short-term interest rates rather than changes in the money supply to gauge the Fed’s intentions. Graph the three-month Treasury bill interest rate (i.e., the 3-Month Treasury Bill: Secondary Market Rate) and the unemployment rate, using annual data since 1961. If changes in monetary policy are reflected primarily by changes in the short-term interest rate, what relationship would you expect to see between these two variables? Does this relationship hold up in the data
If money
than the money supply itself. When the Fed follows an interest-rate-targeting policy,
“Fed watchers” in financial markets and the media typically look to changes in
short-term interest rates rather than changes in the money supply to gauge the
Fed’s intentions. Graph the three-month Treasury bill interest rate (i.e., the 3-Month
Treasury Bill: Secondary Market Rate) and the
data since 1961. If changes in
the short-term interest rate, what relationship would you expect to see between
these two variables? Does this relationship hold up in the data?
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