Monetary policy is more effective at closing an expansionary gap than a recessionary gap because:
A)banks may be unwilling to lend and seeking more liquidity, thereby offsetting any expansionary policy.
B)households and firms make situations worse by borrowing too much from the excess reserves.
C)the implementation lag for an expansionary policy is longer than that for a contractionary policy.
D)most expansionary monetary policies get delayed due to several governmental regulations.
E)expansionary monetary policies aggravate the crowding-out effect that might render them ineffective.

Question

Quizplus · Accepted Answer

When the economy is in a recessionary gap, there is less spending and borrowing, leading to excess reserves in banks. Monetary policymakers can stimulate spending and lending by lowering interest rates, but if banks are unwilling to lend and instead seek more liquidity, the impact of monetary policy may be offset. On the other hand, during an expansionary gap, there is already high spending and borrowing, and monetary policymakers can lower spending by raising interest rates, which is a more effective tool.

Monetary Policy Is More Effective at Closing an Expansionary Gap