Answer to Question #52840 in Macroeconomics for Ellie
The interest rate channel plays a key role in the transmission of monetary impulses to the real economy. The central bank of a major country is, in principle, able to trigger expansionary and restrictive effects in the real economy, by varying the federal funds rate and hence the short-term nominal interest rate. However, it is difficult to explain how, with this channel, a central bank might target a relatively stable and low inflation rate of a longer time period.
Although changes in the central bank’s policy interest rate can affect commercial interest rates quite quickly, there can be a significant lag before those changes influence spending and saving decisions, in turn having an impact on overall output.
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