The effectiveness of monetary policy is increased
A)In the liquidity trap.
B)When investment demand becomes more responsive to changes in the interest rate.
C)If the velocity of money is constant.

Question

Quizplus · Accepted Answer

When investment demand becomes more responsive to changes in the interest rate, monetary policy tools such as changes in interest rates can have a more significant impact on the economy. This is because a more responsive investment demand means that changes in interest rates will lead to larger changes in investment, consumption, and overall economic activity. In a liquidity trap, where interest rates are already very low, monetary policy may not be very effective. And while a constant velocity of money can make it easier to predict the impact of changes in the money supply, it does not necessarily increase the effectiveness of monetary policy.

The Effectiveness of Monetary Policy Is Increased