Explore BrainMass

Explore BrainMass

    monetary authority

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    --------------------------------------------------------------------------------
    If the monetary authority wants to stimulate an economy in a recession, it often reduces interest rates, and if the inflation rate is low, as it has been in the early part of the current decade, these interest rates can become very low. How effective is this monetary policy if the demand for loans is shrinking, even at a very low interest rate? Why would demand for loans decline if interest rates are declining?

    © BrainMass Inc. brainmass.com March 4, 2021, 6:13 pm ad1c9bdddf
    https://brainmass.com/economics/general-equilibrium/monetary-authority-interest-rate-35280

    Solution Preview

    see attachment

    If the monetary authority wants to stimulate an economy in a recession, it often reduces interest rates, and if the inflation rate is low, as it has been in the early part of the current decade, these interest rates can become very low. How effective is this monetary policy if the demand for loans is shrinking, even at a very low interest rate? Why would demand for loans decline if interest rates are declining?

    I suspect this question is getting at liquidity trap problems faced by countries like Japan currently. We know from our ISLM framework that in the short run increasing the money supply can lower the interest rate and ...

    Solution Summary

    How effective is this monetary policy if the demand for loans is shrinking, even at a very low interest rate? Why would demand for loans decline if interest rates are declining?

    $2.49

    ADVERTISEMENT