Question

How might each of the following factors complicate the implementation of monetary policy: long and variable lags, excess reserves, and movements in velocity?

a) Long lags delay policy effects; Excess reserves hinder policy; Velocity changes affect policy transmission
b) Long lags accelerate policy effects; Excess reserves facilitate policy; Velocity changes have no effect on policy
c) Long lags have no impact on policy; Excess reserves improve policy; Velocity changes enhance policy
d) Long lags amplify policy effects; Excess reserves impede policy; Velocity changes impede policy

Answer 1

Long and variable lags, excess reserves, and movements in velocity can complicate the implementation of monetary policy. Movements in velocity: Velocity refers to the speed at which money circulates in the economy. When velocity is unstable or unpredictable, it can make it challenging for policymakers.

Step-by-step explanation:

The factors that can complicate the implementation of monetary policy are long and variable lags, excess reserves, and movements in velocity. Long and variable lags: When implementing monetary policy, there is often a significant time delay between the policy actions and their effects on the economy. This makes it difficult for policymakers to accurately predict the impact of their actions.

Excess reserves: If banks hold excess reserves instead of lending them, it can limit the effectiveness of monetary policy in stimulating economic activity. Movements in velocity: Velocity refers to the speed at which money circulates in the economy. When velocity is unstable or unpredictable, it can make it challenging for policymakers to control inflation or stimulate economic growth.