Questions and Answers
Which of the following is NOT a weakness of monetary policy?
Difficulty in adjusting interest rates incrementally
What can help stabilize the economy?
Investing in infrastructure and providing incentives for firms to invest
Which policy is highly effective in a recession?
Fiscal policy
Study Notes
- Deflation leads to high levels of unemployment and bankruptcies.
- Demand-pull inflation can be caused by factors such as lower taxes, government spending, and growing consumer confidence.
- Governments can use contractionary fiscal and monetary policies to decrease aggregate demand and cure inflation.
- Investing in infrastructure and providing incentives for firms to invest can help stabilize the economy.
- Fiscal policy can target certain sectors of the economy and is highly effective in a recession.
- Weaknesses of fiscal policy include political influence and the possibility of "crowding out" private investment.
- The role of a central bank includes regulating commercial banks and determining interest rates.
- Strengths of monetary policy include independence of the central bank and the ability to adjust interest rates incrementally.
- Weaknesses of monetary policy include interest inelastic consumption/investment and conflicting government objectives.
- In a recession, firms and consumers may simply repay debts instead of borrowing, limiting the effectiveness of monetary policy.
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