Which of the following best characterizes the effects of monetary policy?
A)Monetary policy is neutral in both the short run and the long run; therefore, it does not affect real variables.
B)Monetary policy is neutral in the long run, but it may have effects on real variables in the short run.
C)Monetary policy has profound effects on real variables in both the short run and the long run.
D)Monetary policy has profound effects on real variables in the long run, but is neutral in the short run.

Question

Quizplus · Accepted Answer

While monetary policy may be neutral in the long run, it can have effects on real variables, such as inflation and employment, in the short run. For example, if the central bank lowers interest rates to stimulate economic growth, this can lead to increased borrowing and spending in the short run, which can lead to inflation if the economy overheats. However, over the long run, these effects may dissipate as the economy adjusts to the new conditions.

Which of the Following Best Characterizes the Effects of Monetary