Consider an economy in which the central bank uses the interest rate as its policy instrument....

Consider an economy in which the central bank uses the interest rate as its policy instrument. The policy-makers judge that the unemployment rate is too high and decide to pursue expansionary monetary policy to raise the output level.

a. Illustrate and explain how expansionary monetary policy is expected to raise the output level. How would components of aggregate demand be affected by this policy?

b. What are the limitations of expansionary monetary policy? What are the options available to the policymakers once these limitations are encountered? Explain and illustrate.

Expert Solution

Rahul Sunny answered 1 year ago

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