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In late 2001, and once again in the current economic environment, monetary policy was aimed at lowering short term interest rates.

(a) describe the rationale, given the economic environment at the time, for pursuing this policy

(b) Using the standard IS/LM model, describe how the scope of monetary policy to lower interest rates depends in the interest elasticity of money demand.

(c) describe how the scope of monetary policy to lower interest rates becomes limited as the interest elasticity of money demand approaches infinity. Is this just a theoretical curiosity, or are there any real world situations where this might arise?

(d) Using the standard IS/LM model, describe how the scope of monetary policy to change real economic activity in the short run depends on the private sector reaction to interest rate changes.

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M947914

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