In a free market economy, monetary authorities like BoG face a trade-off between targeting money supply and interest rates due to the liquidity preference and IS-LM framework. They can set one (e.g., via OMOs), but the other adjusts endogenously to market forces. Targeting money supply (vertical MS curve) lets rates fluctuate with demand shifts; targeting rates (horizontal MS at target rate) lets supply adjust. This impossibility arises from unpredictable velocity, expectations, and external shocks, as per Friedman’s critique of fine-tuning.

Explanation:

• Money Demand (MD): Downward sloping; higher rates reduce holding money.
• If target MS growth (e.g., fixed MS), rate clears at MD-MS intersection; demand increase raises rates.
• If target rate (e.g., fixed i), adjust MS to meet MD; can’t control MS volume.
• In Ghana, BoG’s inflation targeting prioritizes rates (MPR), allowing M2 to vary (e.g., 20-30% growth post-2022 crisis).

Diagram (IS-LM style for money market):

For supply target: Fixed vertical MS; equilibrium i where intersects MD. Shift MD right: i rises, MS fixed. For rate target: Horizontal MS at i*; shift MD: MS shifts to new intersection, MS changes.

This dilemma, evident in Ghana’s shift from money targeting (pre-2002) to rate-focused policy, underscores limits of control in open economies with capital flows.