Evaluate the effectiveness of monetary policy to increase AD during a recession

Monetary policy encompasses the policies the central bank uses to influence interest rates in order to change AD. A recession is when there is an economic contraction where real GDP falls for 2 consecutive quarters. Expansionary monetary policy would be used which is when base interest rates are lowered which through the transmission mechanism should increase AD by increasing consumption and investment. This is an effective way of increasing AD as it can be done incrementally and in a controlled way to increase AD to the correct level. It can also be done quickly, as the central bank is independent and does not require political involvement.

However, it may not be extremely effective due to time lags in the transmission mechanism which mean AD will take a long time to increase. If the recession is particularly bad may not work as if confidence is too low consumption and investment will not increase and banks may be unwilling to lend, as seen after 2008. Could result in liquidity tap wear near 0 base rates are ineffective. May conflict with other objectives such as inflation targets. The effectiveness also depends on the interest rate elasticity of a country and will affect different stakeholders differently. Other policies such as fiscal or supply side may be needed in these cases.