Essay Monetary Policy Economy

For example, monetary policy’s effectiveness depends on the magnitude of the change in interest rates.Monetary policy is more effective the larger the change in interest rates.Monetary policy is more effective in raising real GDP the more elastic is LRAS.

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Moreover, the shift in AD depends upon the size of the multiplier.(2) Controlled Expansion: The second objective is to control the prices and reduce the inflationary pressures in the economy.The monetary policy of the Reserve Bank during the planning period is appropriately termed as that of “Controlled expansion”.Monetary policy is more effective the larger the multiplier.Additionally, an interest rate drop will not affect investment if investment is interest inelastic because investment does not respond to interest rates.For instance, a fall in interest rates means the cost of borrowing falls so consumers take out more loans and buy more credit-bought items.Furthermore, the return on savings falls so saving becomes less attractive and consumption becomes more attractive.Moreover, a fall in interest rates means the cost of borrowing falls, investment becomes cheaper so firms take out more loans and invest more.Investment rises, AD rises, the price level rises and real GDP rises.Moreover, lower interest rates means mortgages are cheaper so demand for houses rise and house prices rise.As house prices rise, homeowners’ wealth rises inducing a wealth effect.

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