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Moreover, lower interest rates means mortgages are cheaper so demand for houses rise and house prices rise.
Monetary policy is more effective in raising real GDP the more elastic is LRAS.
Conversely, monetary policy is more effective in raising inflation the more inelastic is LRAS.
For example, monetary policy’s effectiveness depends on the magnitude of the change in interest rates.
Monetary policy is more effective the larger the change in interest rates.
Multiplier effects make AD rise further and, eventually, real GDP and the price level rises.
Monetary policy works through a number of mechanisms including, for example, consumption, investment and the housing market.If LRAS is elastic there is a lot of spare capacity, a loose monetary policy boosts AD, real GDP rises a lot but the price level rises a little bit (or maybe stays the same).Here is an essay on the ‘Monetary Policy’ for class 11 and 12.Consumption rises, AD rises, the price level rises and real GDP rises.Also, a lower interest rate means savings generates a lower return so more investment projects become profitable.Thus, controlled expansion of money supply was essential for growth with reasonable price stability in the country.To achieve the objectives of the monetary policy, the Reserve Bank has adopted the following measures: (A) Measures for expansion of currency and credit. These measures are discussed in detail as follows: A.Monetary policy is more effective the larger the multiplier.Additionally, an interest rate drop will not affect investment if investment is interest inelastic because investment does not respond to interest rates.Every economy faces two conflicting interests: (a) Expansion of money supply to finance the process of economic development.(b) Control of money supply to check inflationary pressure generated in the economy as a result of vast developmental and non-developmental expenditure.