Monetary Policy in Depression:In the atmosphere of depression, there is a need to encourage investment and so the loans are made cheaper to stimulate investment and increase the demand by increasing income and employment because a cheap money policy will discourage saving and promote investment.It is said that the Monetary Policy has less scope in depression and fails to bring the economy out of depression, as the MEC is low and so the businessmen are scared to invest, even though the rate of interest is low. Rate of interest is the factor but not the only factor for investment.Businessmen borrow when the business is expanding not when it is declining. However, we cannot say it is totally useless because it can stimulate demand for durable goods and private investment. But open market operation can increase the liquidity...
Multiplier-Acceleration Interaction Principle of Business Cycle
Samuelson’s model is regarded as the first step in the direction of integrating theory of Multiplier and the principle of Acceleration. His model shows how the multiplier and acceleration interact with each other to generate income, to increase consumption and investment, demand more than expected and how this causes economic fluctuations.To understand Samuelson’s model, let us first understand derived investment. Derived demand is the investment in capital equipment, which is undertaken due to increase in consumption making new investment necessary. We will try to understand this interaction briefly. When autonomous investment takes place in a society, income of the people rises and the process of Multiplier start increasing the income, which leads to the increase in demand for consumer goods depending on the marginal...
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