Question

Monetary policy is effective in affecting output int he short-run because: a. prices are fixed in...

Monetary policy is effective in affecting output int he short-run because:

a. prices are fixed in short run

b. prices are fixed in long run

c. prices are flexible in short run

d. output is flexible in long run

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Answer #1

In the short run, prices and output are fixed and do not adjust. So, Option c is incorrect

In the long run, prices and output becomes variable. So, option b. is incorrect

The goal of the monetary policy is to keep the inflation under control and change the output level and bring it to full potential output level.

In the short run, the prices are fixed and rigid, so the Central Bank doesn't have to really care for the inflation and can put its focus more on the closing the output gap.

So, monetary policy is most effective when the prices are stable and fixed.

Hence, option a. is correct

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