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    Monetary Policy and Interest Rates

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    Most economists consider interest rates to be the principal instrument by which monetary policy affects economic activity. However, significant changes in the structure of financial markets have altered the interest rate channel. Do you agree or disagree with this point of view?

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    Solution Preview

    Most economists consider interest rates to be the principal instrument by which monetary policy affects economic activity. However, significant changes in the structure of financial markets have altered the interest rate channel. Do you agree or disagree with this point of view?

    The monetary transmission mechanism is one of the most studied areas of monetary economics for two reasons. First, understanding how monetary policy affects the economy is essential to evaluating what the stance of monetary policy is at a particular point in time. Even if a central bank's policy instrument, for example, the federal funds rate in the United States, is low, monetary policy may well be restrictive because of effects that monetary policy has had on other asset ...

    Solution Summary

    Monetary policy and interest rates are examined. The significant changes in the structure of financial markets with altered interest rate channels are provided.

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