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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

Approximately how long does it take a change in monetary policy to influence aggregate demand?

a. 1 month

b. 6 months

c. 2 years

d. 5 years

To determine

Time taken for the monetary policy to influence aggregate demand.

Answer

Option ‘b’ is correct.

Explanation

Option (b):

Many studies suggest that it takes at least 6 months for the monetary policy to have an effect on aggregate demand. Monetary policy affects aggregate demand primarily by changing interest rates. However, mostly households and firms set their spending plans in advance; as a result, there is a time lag for changes in interest rate to alter the aggregate demand for goods and services Thus, option ‘b’ is correct.

Option (a):

Monetary policy works with a lag and hence, one month is insufficient for the monetary policy to reflect changes in the economy. Thus, option ‘a’ is incorrect.

Option (c):

Long lags suggest a policy that is passive rather than active, and such long gaps have an opposite effect on the economy (destabilization) as the economic conditions change from time to time. Two years is a long lag and thus, option ‘c’ is incorrect.

Option (d):

Long lags suggest a policy that is passive rather than active and such long gaps have an opposite effect on the economy (destabilization) as the economic conditions change from time to time. Five years is a really long lag and thus,option ‘d’ is incorrect.

Concept

Monetary policy: It refers to the credit control system adopted by the central bank of a country with an aim to achieve its macroeconomic policy objectives.

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