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Limitations of monetary policy

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Describe the limitations on the ability of the Fed to expand the money supply.

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Three limitations of monetary policy are provided in the solution.

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Monetary policy is limited in several ways. One weakness is that tight money policy works better than loose money policy. Tight money works on bringing money in to stop circulation, but for loose policy to really work, people have to want loans and want to spend more. Another problem is monetary velocity. The number of times per year a dollar changes hands for goods and services is completely independent of the money supply, and can sometimes contradict the efforts of the Fed. A final problem is that the Fed must sometimes choose ...

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