The relationship between monetary policy and the time it takes for policy to change spending is an example of the benefits of "leaning against the wind" why fiscal policy is preferable because it does not suffer from lags. the condition that monetary policy affects the economy almost immediately the problem that monetary policy affects aggregate demand primarily by changing interest rates but it takes time for changes in interest rates to alter spending.
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The monetary policy is implemented using the tools of interest rates, open market operations, and changing reserve ratio requirements. These decisions can be taken independently by the central bank.
Option 4 is correct. The implementation of monetary policy will take time. While the interest rate can be changed immediately, the economy may be slow to react to this change. Furthermore, spending decisions are not made immediately; they will be examined by both consumers and firms when undertaking new spending. Thus incorporating this new information into their spending decision can take time.
Option 1 is incorrect. While leaning against the wind may have some benefits, especially when the presence of automatic stabilizers is particularly robust, the time lag between the implementation and effect of a change in monetary policy results from the slow incorporation of these changes into decision making.
Option 2 is incorrect. Fiscal policy will also have lagged effects on the economy. Government spending can help investments in public projects such as schools, but the effect of these improvements can only be felt in the long term.
Option 4 is incorrect. Monetary policy does not have an immediate effect on the economy as spending decisions are not made immediately. It takes time for firms and consumers to consider the new interest rate when making any consumption or investment decisions.
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