Purchase Solution

monetary authority

Not what you're looking for?

Ask Custom Question

--------------------------------------------------------------------------------
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?

Purchase this Solution
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?

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 ...

Purchase this Solution
Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

View More Free Quizzes
Related BrainMass Solutions

  • Fed monetary policies

    In other nations, the monetary authority may be able to mandate specific interest rates on loans, savings accounts or other financial assets. By altering the interest rate(s) under its control, a monetary authority can affect the money supply.

  • Monetary Policy

    Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.

  • a seasonal pattern to interest rates in Hong Kong

    Consider the Hong Kong Monetary authority which is the currency board for Hong Kong.

  • bank reserves, the money supply, interest rates, and aggregate demand

    In other nations, the monetary authority may be able to mandate specific interest rates on loans, savings accounts or other financial assets. By altering the interest rate(s) under its control, a monetary authority can affect the money supply.

  • How Money is Created

    In other nations, the monetary authority may be able to mandate specific interest rates on loans, savings accounts or other financial assets. By altering the interest rate(s) under its control, a monetary authority can affect the money supply.

  • Monetary Policy

    In other nations, the monetary authority may be able to mandate specific interest rates on loans, savings accounts or other financial assets. By altering the interest rate(s) under its control, a monetary authority can affect the money supply.

  • contractionary policy

    In other nations, the monetary authority may be able to mandate specific interest rates on loans, savings accounts or other financial assets. By altering the interest rate(s) under its control, a monetary authority can affect the money supply.

  • stabilization policy and Fed

    In other nations, the monetary authority may be able to mandate specific interest rates on loans, savings accounts or other financial assets. By altering the interest rate(s) under its control, a monetary authority can affect the money supply.

  • GDP and unemployment

    35281 GDP and unemployment In a monetary policy designed to slow inflation, what are the risks to other macroeconomic measures such as real GDP and unemployment? How can the monetary authority mitigate these risks?

View More Related Solutions