Question

In a paragraph each, please explain what is monetary policy, who is in charge of it, what tools are used to implement it, and how the economy responds to it

Answer 1

Monetary policy is determined by the central bank. It has two tools- interest rates and money supply.

Fig b. below shows deflationary gap. Aggregate demand goes down from AD1 to AD2. Real GDP goes down from Yf to Ye and price levels from Pf to Pe. Now to get out of recessionary gap:During an deflationary level, govt. can adopt expansionary fiscal policy(lowering tax rates and increasing govt. spending) and central bank can have expansionary monetary policy ( lowering interest rates and increasing money supply ). These policies can be used to separately.

Lowering interest rates makes borrowing easier for both investors and common people. Rather than saving they like to spend more.

This leads to a shift back from AD2 to AD1. Price levels start to go up and businesses and consumers start feeling confident further and economy comes back to normalcy.