Question

Monetary policy is neutral in both the short-run and the long-run. b. Though monetary policy is neutral in the long-run, it may have effects on real variables in the short-run. c. Monetary policy has profound effects on real variables in both the short-run and the long-run. d. Monetary policy has profound effects on real variables in the long-run, but is neutral in the short-run.

Answer 1

Answer:

b

Explanation:

Monetary policy are policies taken by the central bank of a country to shift aggregate demand.

Tools of monetary policy

1. Open market operations : government can either sell bonds to the public, this is known as open market sales. this is an example of an contractionary policy or it can buy bonds from the public. this is known as open market purchase. it is an expansionary policy

2. Reserve Requirement : Reserves are the proportion of deposits required by the central bank that banks keep

If reserve requirement is increased, it is an example of a contractionary policy. If on the other hand, it is reduced, it is an example of an expansionary policy.  

3. Discount rate : this is the rate at which the central bank lends to commercial banks. An increase in discount rate is a contractionary policy while an decrease in discount rate is an expansionary policy  

There are two types of monetary policy :

Expansionary monetary policy : these are polices taken in order to increase money supply. When money supply increases, aggregate demand increases. reducing interest rate and open market purchase are ways of carrying out expansionary monetary policy

Contractionary monetary policy : these are policies taken to reduce money supply. When money supply decreases, aggregate demand falls. Increasing interest rate and open market sales are ways of carrying out contractionary monetary policy

Goals of monetary policy include  

• financial market stability  

• economic growth

• high employment  

Money neutrality is an economic theory that changes in money supply do not affect real variables but only affect nominal variables. As a result, monetary policy is neutral in the long-run and affects real variables in the short-run.