Question

Expansionary monetary policy has short run consequences through its impact on ___________; and long run consequences through its impact on _________.

		fiscal policy and taxes
		consumption and investment
		saving and investment
		interest rates and output

Answer 1

Expansionary monetary policy has short run consequences through its impact on

interest rates and output and long run consequences through impact on consumption and investment.

This is because in return for the loans, the central bank charges a short-term interest rate. By decreasing the short-term interest rates, the central bank reduces the cost of borrowing to commercial banks and output increases.

In long run, an expansionary monetary policy reduces the cost of borrowing. Therefore, consumers tend to spend more while businesses are encouraged to make larger capital investments.