Question

"Autonomous monetary policy is more effective at changing output when $\mathrm{\lambda }$ is higher." Is this statement true, false, or uncertain$?$ Explain your answer.

Short answer

The impact in output is true when$\mathrm{\lambda }$is higher.

Step-by-step solution

Introduction

Monetary autonomy refers to a country's central bank's ability to influence its own money supply and domestic economic conditions.

In a floating exchange rate regime, the central bank has complete control over the money supply.

The macroeconomic policy trilemma states that an independent monetary policy, a stable exchange rate.

And unfettered capital movement are all impossible to achieve at the same time.

Explanation

The response of real interest rates to current inflation rates is called $\mathrm{\lambda }$.

Under the influence of inflation, the larger the $\mathrm{\lambda }$, the higher the interest rates.

Regardless of the current value of $\mathrm{\lambda }$, every change in autonomous monetary policy will have the same effect on output.