Which of the following helps to explain why time lags cause monetary policy to b
ID: 1197712 • Letter: W
Question
Which of the following helps to explain why time lags cause monetary policy to be difficult to conduct?
It takes time to recognize that there is a problem. For example, changes in consumer or business confidence can be difficult to recognize as they are occurring.
The changes in interest rates that policymakers cause do not have an immediate effect on the economy.
It takes time for the federal reserve to implement changes to the interest rate or the monetary base.
Both (A) and (B) are good answers.
All of the above are good answers.
A.It takes time to recognize that there is a problem. For example, changes in consumer or business confidence can be difficult to recognize as they are occurring.
B.The changes in interest rates that policymakers cause do not have an immediate effect on the economy.
C.It takes time for the federal reserve to implement changes to the interest rate or the monetary base.
D.Both (A) and (B) are good answers.
E.All of the above are good answers.
Explanation / Answer
D: BOTH A AND B ARE GOOD ANSWERS
EXPLANATION: it is difficult to sense the changes in consumer or business confidence as the impact is slow generally like if a consumer prefers tea but due to increasing price of tea people move towards its alternative like coffee, this will a gradual process. similarly the business enviorment in a country changes slowly suppose the tax has been increased on certain type of business, the impact will not be immediate but businessmen will do their cost benefit analysis and then decide.
the changes in interest rates that policymakers cause do not have an immediate effect on the economy. Let us understand it with an example.
Suppose Federal reserve reduces the interest rates which will mean it wants to increase the money supply in the economy. now the banks can lend more of their funds to the public as the rates have reduced. But banks generally do not reduce rates so fast, they would try to enjoy the extra amount of spread they will get by lending at the previous rate. slowly they will pass on the benefit to the people by reducing lending rates and increasing deposit rates.
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