ECO 535 Week 3 Discussion Countercyclical Monetary Policy

ECO 535 Week 3 Discussion Countercyclical Monetary Policy Hello Class1) Change in monetary policy changes the aggregate demand through investment. 2) Yes countercyclical monetary policy is effective in moderating the business cycle ups and down. Explanation: 1) The change in monetary policy by the Federal Reserve changes the money supply in the economy and to maintain the equilibrium in money market interest rate changes, change in interest rate causes a change in investment. An expansionary monetary policy causes an increase in money supply which reduces the interest rate causes an increase in investment as interest rate is the cost of borrowing money and fall in the cost leads to increase in borrowing for investment. Contercyclical monetary policy decreases the money supply which causes a rise in interest rate and rise in interest rate leads to fall in investment. Countercyclical monetary policy means that money supply changes opposite to the change in economic condition, meaning that, when economic is in recession money supply increases and when economy is in boom money supply decreases.