In the United States, suppose that changes in short-term interest rates translate quickly into changes in long-term interest rates, while in China long-term interest rates do not respond as much to changes in short-term rates. In which country would you expect the interest-rate channel of monetary policy to be stronger? A household's decision to buy a car or house or a firm's decision to engage in long-run investment projects generally depends on (longer-term/ shorter-term) interest rates and so the interest-rate channel is likely to be (stronger in the United States/the same in both countries/stronger in China).
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Step 1: In the United States, changes in short-term interest rates quickly translate into changes in long-term interest rates, while in China long-term interest rates do not respond as much to changes in short-term rates. Show more…
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