Monetary policy will have a large income effect provided the
A)sensitivity of autonomous spending to interest rates is high.
B)sensitivity of autonomous spending to interest rates is low.
C)sensitivity of output changes to interest rates is small.
D)None of the above.

Question

Quizplus · Accepted Answer

The income effect of monetary policy is determined by the sensitivity of autonomous spending to interest rates. If this sensitivity is high, then a change in interest rates will lead to a larger change in autonomous spending, which in turn will have a larger impact on output and income. Therefore, option A is the best choice.

Monetary Policy Will Have a Large Income Effect Provided the