In a local newspaper, Rasa reads that stock prices in Lithuania are falling and unemployment is high

In a local newspaper, Rasa reads that stock prices in Lithuania are falling and unemployment is high

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September 3, 2023
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In a local newspaper, Rasa reads that stock prices in Lithuania are falling and unemployment is high and consumption is slowing. Would she classify monetary policy as tight or easy?

To determine whether Rasa would classify monetary policy as tight or easy based on the given information, consider the relationship between monetary policy and the observed economic indicators. Think about how monetary policy influences stock prices, unemployment, and consumption, and whether the current conditions align with a tight or easy monetary policy stance. Additionally, consider the impact of tight and easy monetary policy on these indicators and how they may respond in different economic situations.

Answer and ExplanationSolution by a verified expert

Here is a tip:
A strict monetary policy is related to higher interest rates and an easy monetary policy is related to lower interest rates.

Explanation
When the central bank undertakes an easy monetary policy, it reduces the federal funds rate to increase economic activity.

When the federal funds are lowered, the real interest rate goes down. Consequently, stock prices increase.
Due to a lower real rate of interest, asset prices go up, which increases the value of resources with individuals. As a result, their spending on consumption and durables increases.
In the low-interest-rate environment, business investments become cheaper. Consequently, business investments increase. This increases employment opportunities.
Verified Answer
In this case, the monetary policy will be an easy monetary policy.

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