Why does monetary policy deal more successfully with aggregate demand than real shocks?

Expert Solution

Real shock is a unexpected event like draught,wars , price etc which affects the fundamental factor of production.As the real shock is unpredictable we can not estimate the effect on economy.

But On the other side monetary policy deal successfully with aggregate demand ,when the demand is increases then the price also increases so inflation then to combat inflation central bank increases the interest rate so that the money supply decreases and then demand decreases and so price decreases.

If there are deflation then central bank decreases the interest rate so money supply increases and demand increases.

So we can say that monetary policy deal more successfully with aggregate demand than real shocks.

Rahul Sunny answered 2 years ago

A. Why does monetary policy have a greater effect on aggregate demand in an open economy...

A. Why does monetary policy have a greater effect on aggregate demand in an open economy than in a closed economy? B. Why does fiscal policy have a smaller effect on aggregate demand in an open economy than in a closed economy?

How does a tightening or easing of monetary policy by the Fed affect the aggregate demand curve?

How does a tightening or easing of monetary policy by the Fed affect the aggregate demand curve? A. Tightening of monetary policy shifts the aggregate demand curve to the left, while easing of monetary policy shifts the aggregate demand curve to the right. B. Tightening of monetary policy shifts the aggregate demand curve to the right, while easing of monetary policy shifts the aggregate demand curve to the left. C. Tightening or easing of monetary policy does not shift the aggregate demand curve. D....

Why did Keynes believe that Fiscal Policy was more powerful/effective than Monetary Policy?

Fiscal policy is usually: 1) more political than monetary policy. 2) less political than monetary policy....

Fiscal policy is usually: 1) more political than monetary policy. 2) less political than monetary policy. 3) neutral like monetary policy. 4) having the same impact on all citizens. Consider two competing motorcycle manufacturers, Harley-Davidson and Honda. If Harley-Davidson raises the price of its motorcycles, we can expect: 1)a shift to the right in the supply curve of Hondas and lower prices for Hondas. 2)a shift to the left in the supply curve of Hondas and higher prices for Hondas....

A number of real world complications that make monetary and fiscal policy more challenging than simple...

A number of real world complications that make monetary and fiscal policy more challenging than simple theory would suggest. Given the state of the economy and the causes of that state think back to earlier discussions about the current economy- what should be the appropriate mix of fiscal and monetary policy. Form a Keynesian perspective? From a neoclassical perspective? Which makes the most sense to you? Provide evidence ( include and least one link/citation)to provide support to your conclusion.

Explain why the timing of fiscal policy may be more difficult than the timing of monetary...

Explain why the timing of fiscal policy may be more difficult than the timing of monetary policy.

Illustrate using the Aggregate Supply/Aggregate Demand diagram the effect of an expansionary monetary policy on economic...

Illustrate using the Aggregate Supply/Aggregate Demand diagram the effect of an expansionary monetary policy on economic output and price level. Indicate the new equilibrium level.

Explain whether monetary policy can be changed more quickly than fiscal policy and why. During COVID19...

Explain whether monetary policy can be changed more quickly than fiscal policy and why. During COVID19 pandemic both fiscal and monetary polices were used by many governments. Describe whether there were significant time differences in the use of either policy and why the difference if any.

Consider what causes the lags in the effect of monetary and fiscal policy on aggregate demand....

Consider what causes the lags in the effect of monetary and fiscal policy on aggregate demand. What are the implications of these lags for the debate over active versus passive policy?

Monetary and fiscal policy instruments are used to affect the aggregate demand (AD) in the economy....

Monetary and fiscal policy instruments are used to affect the aggregate demand (AD) in the economy. What is the difference between contractionary and expansionary monetary policy? What is the difference between contractionary and expansionary fiscal policy? How does each policy affect the AD in the economy? What are the benefits and major problems of the fiscal policy and monetary policy?

Question