In a recent economic forum meeting, Jason Federmeyer of the Bank of Detroit, and Lawrence Lobovsky of the Bank of Tulsa, were discussing the demand for money and how it has changed over the years. Federmeyer made the following two statements to Lobovsky: Statement 1: Financial innovation has significantly affected the demand for money. The increased use of credit cards and debit cards, interest-bearing checking accounts, internet banking and even the large number of ATMs around the world have all helped to increase the demand for money above what it would have been if only the increase in real GDP were at work. Statement 2: Although the quantity of money demanded is largely determined by interest rates, the supply of money is determined by the central bank and is independent of interest rates. Are Statement 1 and Statement 2 as made by Federmeyer correct? Statement 1 Statement 2 A) Incorrect Incorrect B) Correct Incorrect C) Incorrect Correct D) Correct Correct answer is C but in some countries it may not be central bank who decides interest rate…in that case it would have been A… so how to approach questions like this… Thanks…
You don’t argue with the CFA institute…save for your buddies…do as they say…in this case, the Feds ( central banks in other countries) control the money supply.
Basically, interest rate doesn’t not affect Supply of money and only affect DD for money. Thats the supply curve is vertical in the graph.