Answer to Question #113868 in Macroeconomics for Asantewaa

Question

Assume the interest rate fall. Under what circumstance will it lead to a)A large rise in business investment
B) little or no change in business investment

Answer 1

Monetary policy, like fiscal policy, suffers from lags that might hamper how effective it can be at closing an output gap. First of all, it takes time to recognize that there is a problem in the economy and react appropriately. Second, even if the interest rate changes quickly when OMOs are carried out, the impact of the interest rate change takes time.