As we observed in the chapter, central banks, rather than purposefully setting the level of the money supply, usually set a target level for a short-term interest rate by standing ready to lend or borrow whatever money people wish to hold at that interest rate. (When people need more money for some reason other than a change in the interest rate, the money supply therefore expands, and it contracts when they wish to hold less.) Part 2 a. Describe the problems that might arise if a central bank sets monetary policy by holding the market interest rate constant. (First, consider the flexible-price case, and ask yourself if you can find a unique equilibrium price level when the central bank simply gives people all the money they wish to hold at the pegged interest rate. Then consider the sticky-price case.) A.Regardless of whether prices are flexible or sticky, an increase in the demand for money would require the central bank to constantly increase the money supply to maintain the interest rate. Thus, there would not be a unique solution in either case. B.Regardless of whether prices are flexible or sticky, an increase in the demand for money would require the central bank to constantly decrease the money supply to maintain the interest rate. Thus, there would not be a unique solution in either case. C.If prices are flexible, an increase in the demand for money would require the central bank to constantly increase the money supply to maintain the interest rate. Thus, there would not be a unique solution. However, if prices were sticky, then a unique solution could be found. D.If prices are flexible, an increase in the demand for money would require the central bank to constantly decrease the money supply to maintain the interest rate. Thus, there would not be a unique solution. However, if prices were sticky, then a unique solution could be found.