Q. In late 2001, and once again in the current economic situation, economic policy was aimed at lowering short term interest rates.
(a) Explain the rationale, given the economic environment at the same time, for follow this kind of policy.
(b) Utilizing the standard IS/LM model, elucidate how scope of monetary policy to lower interest rates depends in the interest elasticity of money demand.
(c) Explain how the scope of monetary policy to lower interest rates becomes limited as the interest elasticity of money demand advanced infinity. Elucidate that it is just a theoretical curiosity; otherwise there are any real world circumstances where this might arise?
(d) Utilizing the standard IS/LM model, elucidate how the scope of monetary policy to change real economic activity in the short run depends on the private sector reaction to interest rate changes.