Monetary policy becomes more effective as

Question

Quizplus · Accepted Answer

Monetary policy becomes more effective when the interest sensitivity of money demand decreases, which means that changes in interest rates have a larger impact on the demand for money. As a result, when interest rates are lowered, people and businesses are more likely to borrow money and spend it, boosting economic activity. This effectiveness is limited if people choose to save rather than spend the borrowed money, so A is not correct. The interest sensitivity of investment is related to fiscal policy, not monetary policy, so C is not correct. The income tax rate is also related to fiscal policy, so D is not correct.

Monetary Policy Becomes More Effective as