Question

“The Bangladesh Bank has created additional money worth Tk70,794 crore through various refinance
schemes and easing regulatory requirements after the Covid-19 outbreak in March for stimulating
demand to revive the declining economy.
Answer the following question:
a) According to Keynesians, how can the transmission mechanism get blocked? Given the current
Covid-19 situation, do you think these two issues occurring are likely? Explain your answer
linking the two issues to the current situation. Use diagrams.

Answer 1

Here the central bank is trying to revive economy through the expansionary monetary policy. The refinance and lose regulatory facilities would cause the rise in the money supply thereby dragging down the interest rate.

But here the presence of liquidity trap situation might make the monetary policy quite ineffective in dealing with recession .

Following is the diagram: