Which of the following statements is correct? Monetary policy decisions can be made very quickly. Monetary...

Which of the following statements is correct?

Monetary policy decisions can be made very quickly.

Monetary policy, once implemented, is immediately effective.

The Fed usually foresees macroeconomic problems.

Monetary policy takes a long time to be implemented. To reduce unemployment,

which of the following monetary policy action could be effective in the short run?

Decrease interest rate

Decrease money supply

Increase reserve requirement

Selling bonds

What kind of monetary policy can be used to reduce the rate of inflation?

Selling bonds

Lowering the interest rate

Any expansionary monetary policy would work.

None of the above would work.

Solutions

Expert Solution

In the first question the correct option is that monetary policy decisions can be made very quickly. The reason is that the Federal Reserve is an independent body and it does not require any sanction from the government to implement a policy change. The implementation is quick but the effectiveness of the policy takes time to have its consequences and therefore the results are not very quick.

The correct choice for the second question is selling bonds. It is a part of open market operations. Usually the central bank in any particular Nation uses the open market operations more frequently than any other monetary policy tool because it is readily effective.

The answer to the last question is selling bonds , when the central bank sells Government Bonds in the market, it reduces the amount of money in circulation which means the money supply is reduced. Reduction in the money supply will shift the aggregate demand curve to the left and it will reduce the rate of inflation.

Rahul Sunny answered 1 year ago

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