Answer to Question #209957 in Macroeconomics for unkown 1010

Question

This diagram from the economist argues that investment (spending by firms) is influenced more by how the firm is doing  rather than the central interest rate. It also shows that  shareholders (consumers) are earning good returns from their  money as a result of this business success. 

Explain why monetary policy may be less effective as a  result of this information.

Answer 1

Money policy involves actions undertaken by the nation's central bank to control money supply in order to achieve sustainable economic growth. Monetary policy consists of the management of money supply and interest rates with the aim of meeting the macroeconomics objectives such as controlling inflation, consumption and growth. Therefore monetary policy may be less effective as a result of: a) Effects of a time tag_ macro effects of monetary policy generally occur after a some time. So effects may take months or even years to materialize thus having a negative impacts on the shareholders expecting good returns.

b) Technical limitations_ interest rates can be only lowered nominally to 0% which limits the bank's use of this policy too where interest rates are already low. This will make some banks to experience a negative interest rate into policy .

c)Monetary policy tools have an economy wide impact and do not consider the fact that some areas within a state might not need the stimulus while states with high unemployment might need the stimulus more.