Answer to Question #120893 in Macroeconomics for khadija

Question

how graphically, that if the money demand is unstable, pegging the interest rate is better than pegging the money supply. now suppose these fluctuations were in the is curve, will you still recommend pegging the interest rates? why?

Answer 1

A fall in demand for money could be caused by inflation, interest rates and even level of income. People will not want to hold more money.

Pegging is controlling a country's currency rate by steering an asset's price prior to option expiration. A country's central bank might engage in open market operations (OPO) to stabilize its currency by pegging it to another country’s currency.

I will not recommend on pegging of interest rates.This is because if the interest rate is pegged it will lead to a higher inflation rate.