Question

In contrast to fiscal policy, which often takes months to have substantial effects on the economy, how would you describe the effect of monetary policy on economic activity?

a) Gradual and delayed
b) Instantaneous
c) Unpredictable
d) Ineffective

Answer 1

Monetary policy has a more gradual and delayed effect on economic activity compared to fiscal policy. So, the correct answer is option a.

Step-by-step explanation:

In contrast to fiscal policy, which often takes months to have substantial effects on the economy, monetary policy has a more gradual and delayed effect on economic activity.

Monetary policy involves a chain of events that takes time to unfold. The central bank must perceive a situation in the economy, hold a meeting, and make a decision to react by tightening or loosening monetary policy. Then, the change in monetary policy must percolate through the banking system, changing the quantity of loans and affecting interest rates. Finally, businesses and consumers must respond to the changes, which can take time to filter through the rest of the economy.

So, the correct answer is option a.