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Figure: Monetary Policy
-(Figure: Monetary Policy)Refer to the figure.Assume that the economy is initially at point Y in the graph.If the Fed takes the appropriate action with monetary policy,but banks are slow to lend,then:
A) the Fed action would be magnified and the economy would move to point X.
B) the Fed action would be nullified and the economy would remain at point Y.
C) the Fed action would be partially effective and the economy would move to point Z.
D) the LRAS curve would shift to the left.

Question

Use the following to answer questions 
Figure: Monetary Policy 
-(Figure: Monetary Policy)Refer to the figure.Assume that the economy is initially at point Y in the graph.If the Fed takes the appropriate action with monetary policy,but banks are slow to lend,then:
A) the Fed action would be magnified and the economy would move to point X. 
B) the Fed action would be nullified and the economy would remain at point Y. 
C) the Fed action would be partially effective and the economy would move to point Z. 
D) the LRAS curve would shift to the left.

Quizplus · Accepted Answer

If banks are slow to lend, then the the impact of the Fed's monetary policy action will be partially effective. This means that the economy will move to point Z, which is a smaller increase in output and a smaller decrease in unemployment than would have occurred if banks had responded quickly. Therefore, the correct choice is C. Option A is incorrect because even though the Fed's actions would have an impact, it will not be as magnified as it would have been if banks were lending at a normal pace. Option B is also incorrect because the Fed's action would have some impact on the economy, although not as much as it would have been if banks responded quickly. Option D is irrelevant to the scenario given in the question.

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