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.
D)If the money demand curve is elastic.

Question

Quizplus · Accepted Answer

When investment demand becomes more responsive to changes in the interest rate, the demand for loans will increase, thus increasing the effectiveness of monetary policy. This is because a change in the interest rate will have a greater impact on investment choices, leading to changes in aggregate demand and output. In a liquidity trap (option A), monetary policy is ineffective, while a constant velocity of money (option C) and an elastic money demand curve (option D) may have some impact on the effectiveness of monetary policy, but not as much as a greater responsiveness of investment demand to changes in the interest rate.

The Effectiveness of Monetary Policy Is Increased