Which of the following will allow monetary policy to be most effective in changing aggregate demand?
A) Interest rates need to be responsive to changes in the money supply, and investment needs to be sensitive to changes in interest rates.
B) Interest rates need to be responsive to changes in the money supply, but investment does NOT need to be sensitive to changes in interest rates.
C) Interest rates do NOT need to be responsive to changes in the money supply, but investment does need to be sensitive to changes in interest rates.
D) Interest rates do NOT need to be responsive to changes in the money supply, and investment does NOT need to be sensitive to changes in interest rates.

Question

Which of the following will allow monetary policy to be most effective in changing aggregate demand?  
A) Interest rates need to be responsive to changes in the money supply, and investment needs to be sensitive to changes in interest rates. 
B) Interest rates need to be responsive to changes in the money supply, but investment does NOT need to be sensitive to changes in interest rates. 
C) Interest rates do NOT need to be responsive to changes in the money supply, but investment does need to be sensitive to changes in interest rates. 
D) Interest rates do NOT need to be responsive to changes in the money supply, and investment does NOT need to be sensitive to changes in interest rates.

Quizplus · Accepted Answer

If interest rates are responsive to changes in the money supply, then the central bank can use changes in interest rates to influence aggregate demand. Additionally, if investment is sensitive to changes in interest rates, then changes in interest rates will have a significant impact on aggregate demand. Both of these factors working together will allow monetary policy to be more effective in changing aggregate demand.

Which of the Following Will Allow Monetary Policy to Be