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Chapter_05 Question Set Monetary Policy 1.Explain why an increase in the money supply can affect interest rates in different ways. Include the potential impact of the money supply on the supply of and the demand for loanable funds when answering this question. 2. Compare the recognition lag and the implementation lag. 3. Assume that the Fed's primary goal is to reduce inflation. How can it achieve its goal? What is a possible adverse effect of such action by the Fed (even if it achieves this goal)? 4. Why do financial market participants closely monitor money supply movements? 5. Describe a passive monetary policy. 6. Describe an active monetary policy. 7.Why might a foreign government's policies be closely monitored by investors in other countries, even if the investors plan no investments in that country? Explain how monetary policy in one country can affect interest rates in other countries