Which of the following statements about monetary policy is true?

Which of the following statements about monetary policy is true?

a. The Fed has precise control of the money supply.

b. In recent times, the Fed has targeted interest rates as opposed to the money supply.

c. In recent times, the Fed has targeted the money supply as opposed to interest rates.

d. The Fed has very little influence on short-term interest rates in the economy.

e. In 2020, the Fed raised reserve requirements to a new high.

Answer: b. In recent times, the Fed has targeted interest rates as opposed to the money supply.

This policy has evolved from employing the money stock as the operating target to the interest rate target in modern monetary operations, as practised by the Fed. This approach adopted by the Fed is called inflation targeting and enables it to bring more influence to the economy. As a result, through manipulation of Federal funds rate, the Fed conducts control over short-term interest rates all around the economy which relates to borrowing prices, investments and, consequently, the economic performance. This strategy offers more flexibility and accuracy in controlling the supply of money in circulation and reacting to specific economic circumstances than plain money supply targeting. Open market operations, changes in the discount rate, and the policy of forward guidance are important approaches through which the Fed manipulates the interest rates to its preferred levels. The change in focus is due to the new definition of the meaning and goals of monetary policy within the context of price stability and economic performance.