Exploring the Limitations of Monetary Policy
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Questions and Answers

According to the study, which type of monetary policy response leads to higher interest rates immediately?

  • Monetary accommodation
  • No monetary accommodation (correct)
  • Labor tax reductions
  • Targeted social transfers

    • What is the effect of government spending increases on GDP compared to similar size social transfers?

  • Equal
  • Twice as big
  • Six times bigger (correct)
  • Slightly bigger

    • Which type of social transfers have double the effect compared to non-targeted transfers?

  • Targeted social transfers (correct)
  • Labor tax reductions
  • Monetary accommodation
  • No monetary accommodation

    • What is the cumulative multiplier for government expenditure with monetary accommodation compared to no monetary accommodation?

    <p>3.9</p> Signup and view all the answers

    What is the effect of labor tax reductions compared to non-targeted transfers?

    <p>Slightly bigger</p> Signup and view all the answers

    What is the effect of fiscal multipliers when there is no monetary accommodation?

    <p>Smaller</p> Signup and view all the answers

    What is the effect of rises in aggregate demand and inflation on real interest rates with monetary accommodation?

    <p>Falls</p> Signup and view all the answers

    What is the effect of additional private sector spending on investment goods with monetary accommodation?

    <p>Increases</p> Signup and view all the answers

    What is the effect of labor tax cuts compared to other factors with monetary accommodation?

    <p>Less positive</p> Signup and view all the answers

    What is the effect of targeted social transfer payments without monetary accommodation?

    <p>0.5</p> Signup and view all the answers

    Which of the following is true about tight fiscal policy and easy monetary policy?

    <p>The private sector will expand and the public sector will shrink</p> Signup and view all the answers

    What is the result of both easy fiscal policy and easy monetary policy?

    <p>A rise in aggregate demand and lower interest rates</p> Signup and view all the answers

    What is the impact of tight monetary policy and tight fiscal policy?

    <p>Interest rates rise and private demand decreases</p> Signup and view all the answers

    What is the main concern of governments when determining the mix of fiscal and monetary policy?

    <p>Stabilizing aggregate demand and promoting potential output growth</p> Signup and view all the answers

    When is an expansion in government spending seen as a high priority?

    <p>When there is a lack of a good quality, trained workforce</p> Signup and view all the answers

    What are the two further issues with implementing fiscal policy in the short run?

    <p>Difficulty in implementation and political ease</p> Signup and view all the answers

    What is the source of fiscal tightening in many cases?

    <p>Automatic stabilizers</p> Signup and view all the answers

    What is the advantage of central banks' independence in raising interest rates?

    <p>It allows for quick implementation of monetary policy</p> Signup and view all the answers

    What is the interaction between monetary and fiscal policies in practice?

    <p>An empirical question</p> Signup and view all the answers

    What did the IMF researchers examine in their research paper?

    <p>The impact of fiscal loosening on tax rates</p> Signup and view all the answers

    Which of the following is a limitation of monetary policy?

    <p>Monetary authorities cannot control the amount of money households and corporations put in banks on deposit.</p> Signup and view all the answers

    What is the relationship between monetary and fiscal policy?

    <p>The impact of fiscal policy may vary under different monetary policy conditions.</p> Signup and view all the answers

    In the case of easy fiscal policy/tight monetary policy, what is the expected impact on aggregate demand?

    <p>Aggregate demand will increase.</p> Signup and view all the answers

    What happens to interest rates in the case of easy fiscal policy/tight monetary policy?

    <p>Interest rates will increase.</p> Signup and view all the answers

    Can monetary authorities easily control the money supply?

    <p>No, they cannot always control the money supply.</p> Signup and view all the answers

    Are monetary and fiscal policies interchangeable?

    <p>No, they have differing impact on aggregate demand.</p> Signup and view all the answers

    What channels do fiscal and monetary policies use to alter aggregate demand?

    <p>Fiscal policy uses taxes, while monetary policy uses interest rates.</p> Signup and view all the answers

    What is the impact of monetary policy on aggregate demand?

    <p>Monetary policy has a positive impact on aggregate demand.</p> Signup and view all the answers

    What is the impact of fiscal policy on aggregate output?

    <p>Fiscal policy has a positive impact on aggregate output.</p> Signup and view all the answers

    What is the ultimate problem for monetary authorities in manipulating the supply of money?

    <p>Monetary authorities cannot control the amount of money households and corporations put in banks on deposit.</p> Signup and view all the answers

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