Overview
Question:
Explain how monetary policy can influence both short-run and long-run macroeconomic outcomes in an open economy. In your answer:
1. Discuss the transmission mechanisms through which changes in the interest rate affect aggregate demand.
2. Explain how exchange rates play a role in the effectiveness of monetary policy in an open economy.
3. Evaluate the limitations of monetary policy when the economy is experiencing a liquidity trap or high inflation.
4. Use relevant economic models such as IS-LM or AD-AS to support your explanation.