Identify Condition Under Which You Would Recommend Activist Monetary Policy

Monetary Policy
Name
Institution
Monetary Policy
Monetary Policy is effective in the short-run but neutral in the long-run.
Economists have always had their say when it comes to policies of stabilization. However, despite there being a significant number of them challenging the credibility of some like monetary policy, others still believe that it deserves its place in stabilization. The debate is yet to wither and as it stands neither of the group is about to loosen its grip on its ideas.
When the monetary policy is implemented, it shows great promise but only in the short-run. With this policy in place, the LM curve characteristically shifts to the down. However, it is essential to note that monetary policy is useful or effective when the LM curve is not flat. While the expectation is that this curve will shift down, if it flattens, the monetary policy will be rendered obsolete. As the LM curve shifts down, the AD curve, on the other hand, will shift right. These two movements or shifts help to indicate that interest rates have decreased and output has in turn increased. The decrease in interest rates will, of course, lead to increased borrowing which means that investments will also sprout. Therefore, it is accurate to say that monetary policy can be an appropriate method of returning an economy to its natural level of output.
However, the changes described above cannot last for a long time. First of all, monetary policy can only steer change when the levels of investment rise which is often triggered by low-interest rates. The interest rate is usually determined or established by the position or movement of the IS curve in conjunction with the movement of the AS curve which determines the output. However, in the long-run, the IS curve shows little to no movement which means that the interest rates are not affected. Consequently, the level of investment also stalls which mean that output level never changes. The above renders the monetary policy ineffective in the medium as well as the long-run.
The condition under which you would recommend activist monetary policy?
When the competition is imperfect, and only a few firms are controlling the price of goods. When this condition is actualized, it is only a few firms which will have control over the market. This means that they will be able to set the price and also dictate how much output they will produce. In a competitive market environment, several firms decide the market pric...