Question

Say that investment increases by $60 for each interest rate drop of 1 percent. Say also that the expenditures multiplier is 4. If the money multiplier is 5, and each 5-unit change in the money supply changes the interest rate by 1 percent, what open market policy would you recommend to increase income by $240

Answer 1

Monetary policy will never be effective if interest rates: not respond to a change in the money supply, and investment spending does not respond to changes in the interest rate.