Monetary Polocies

Monetary Polocies - rate of interest . Keynesian economists...

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Monetary Polocies Monetary policy operates only to bring about variations in the fluctuating price level . But this is a highly unsatisfactory approach. Price level is only a superficial part of the deeper economic phenomenon. When price level is in disorder there is something fundamentally wrong with the real economic processes. Therefore mere changes in the supply of money, intending to correct price level, cannot achieve anything substantial. It is more important to detect real causes of disequilibrium on the supply and demand sides of money and to correct them . Monetary policy attempts to operate through the supply of credit and
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Unformatted text preview: rate of interest . Keynesian economists agree that higher or lower rates of interest may have some indirect effect on the marginal efficiency of capital (MEC). This may influence investment behavior to some extent. But the ability of monetary policy to alter the rate of interest significantly is itself a matter of doubt. Keynes concept of liquidity trap shows that rate of interest is always positive and it never falls below a certain minimum level. Therefore monetary policy ceases to be of any effect beyond such a point....
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