Evaluation of monetary policySyllabus: Evaluate the effectiveness of monetary policy through consideration of factors including:
- the independence of the central bank,
- the ability to adjust interest rates incrementally,
- the ability to implement changes in interest rates relatively quickly,
- time lags,
- limited effectiveness in increasing aggregate demand if the economy is in deep recession and conflict among government economic objectives.
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3. (a) Explain how the aggregate demand curve can be shifted by a reduction in
interest rates. [10 marks]
(b) Evaluate the effectiveness of monetary policy to increase aggregate demand during a recession. [15 marks]
May 2010 TZ1
2. (a) Explain why a country may wish to reduce its rate of inflation. [10 marks]
(b) Evaluate the likely impact on the economy of relying on higher interest rates to
reduce the rate of inflation.