Effectiveness of Monetary Policy
Demand Management (Monetary Policy)
AO3
Syllabus requirement
Discusses limitations (e.g. liquidity trap, confidence) and strengths (e.g. flexibility, short lags) of monetary policy in achieving macroeconomic objectives.
Assessment objectives
AO3 Synthesis and Evaluation
Summary
This topic evaluates how well monetary policy — the central bank's use of interest rates and money supply — can achieve macroeconomic goals such as economic growth, low unemployment and price stability. It explains key strengths (flexibility, reversibility and relatively short implementation lags) and constraints (limited room to cut rates near zero, liquidity traps and low consumer or business confidence) that affect the policy's effectiveness.
