Question

In macroeconomics, suppose that the monetary authority’s goal is to stabilize aggregate output, but that it cannot observe aggregate output in the short-run. If there are shocks to the demand for investment goods, would it be preferable for the monetary authority to target the interest rate or money supply in the short-run? Describe what would happen in the appropriate set of diagrams.

Answer 1

ANSWER:

Generally, it is always good or must prefer to target money supply as the transmissions are faster and also the liquidity crunch gets minimized very easily in order to facilitate the intake and to revive the demand. Anyway if rate of interests are normally used, it will result in the implementation lags and delays in passing on the benefits for the end consumer through the policy lags by the commercial banks and hence can't meet the demand shocks which could derail the aggregate output. Therefore, money supply results in domino effects on the economy and also it's highly recommended policy option in this context or situation.

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