Question

Unlike fiscal policy, which often takes months to have substantial effects on the economy, the effect on economic activity of monetary policy is instantaneous.

O True
O False

Answer 1

Monetary policy is not instantaneous in its effects on the economy; instead, there are significant time lags due to the processes involved from policy decisions to actual economic impact.

Step-by-step explanation:

The statement that the effect on economic activity of monetary policy is instantaneous is false. Effective monetary policy does not have immediate effects on the economy; instead, there are significant hurdles and time lags involved. These lags are due to various stages of the process, from the central bank's initial recognition of economic conditions to the eventual changes in consumer and business behaviors as a result of fluctuating interest rates. These steps include the central bank meetings, decision-making, and the percolation of the policy through the banking system, which then influences interest rates, investment levels, and consumer borrowing patterns, all of which take time before impacting the overall economy.