Final answer:
Monetary policy can effectively manage short-run economic fluctuations when individuals and businesses are slow to adjust their expectations about inflation. Central banks use monetary policy to control aggregate demand and maintain price stability, despite facing challenges such as long policy effect lags and political pressures. b - monetary policy
Step-by-step explanation:
Empirical evidence suggests that individuals do not always immediately take expectations about inflation into account in adjusting their actions. As a result, monetary policy can be effective in dealing with short-run fluctuations in the economy. When individuals and businesses do not incorporate inflation expectations swiftly, the central bank can implement policies that affect aggregate demand and influence macroeconomic outcomes.
High-income economies have learned that using monetary policy is vital in preventing inflation from becoming entrenched. There are significant risks in allowing inflation to persist, as it diverts efforts from productive activities to inflation protection measures. The general consensus is that there are no long-term gains from high inflation, and thus, political support for low inflation combined with the economic tools to maintain it has been established.
However, the implementation of monetary policy comes with challenges, such as long and variable lags in policy effects, excess reserves, unstable velocity of money, and economic goals controversies. Despite these challenges, the key message is that central banks can control aggregate demand through monetary policy, thereby managing the economy's inflationary and growth aspects.