Will a monetary stimulus like this one always works? (That is, suppose Bank Indonesia succesfuly increase...

Will a monetary stimulus like this one always works? (That is, suppose Bank Indonesia succesfuly increase the money supply. What else needs to happen to generate a stimulus?) Explain briefly.

Expert Solution

Monetary Stimulus
Monetary stimulus not always works with expansionary monetary policy or increased money supply. An economy could be able to attain economic stimulus at the time of recession. Following the Keynesian concept, monetary expansion along with fiscal measures helps the economy to stimulate and function better. A monetary expansion may not always help to economic stimulus because of chances of inefficient money supply leading to excess inflation.
A successful expansion of money supply at the time of recession with effective fiscal policies can attract investments and encourage production processes. Inefficient fiscal policies can even leads to further increase in prices and less change in the production of outputs. Economic stimulus being important at recession, effective money supply is necessary for constant economic growth in output than nominal terms.
The monetary stimulus can be a failure when the economy is tending to inflation. Further increase in money supply can create negative impact in the supply of output because of the increased price level. Lack of effective fiscal policies also can make negative impact on economic stimulus and it changes according to the inflationary or deflationary pressure in the economy.

Rahul Sunny answered 2 years ago

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