Monetary Policy: Soft Landing vs. Hard Landing

Question 1

What is a soft landing?

Answer 1

A scenario where a central bank successfully uses interest rate hikes to bring down inflation without triggering a recession.
The economy slows down, but growth continues and unemployment remains relatively stable.

Question 2

What is a hard landing?

Answer 2

A situation where aggressive interest rate hikes lead to a sharp economic contraction (recession).
Characterized by decreased business investment, rising unemployment, and potential business failures.

Question 3

Why are soft landings difficult to achieve?

Answer 3

Uncertainty: Economic forecasting is complex. It’s hard to predict the exact impact of interest rate changes.
Time Lags: The full impact of monetary policy changes takes time to manifest.
External Shocks: Unforeseen global or domestic events can disrupt the economy and throw off central banks’ calculations.

Question 4

What is the main tool used in monetary policy to influence the economy?

Answer 4

Interest rates.
Raising interest rates makes borrowing more expensive, slowing down spending and cooling the economy.
Lowering interest rates makes borrowing cheaper, encouraging spending, and stimulating economic growth.