The effectiveness of monetary policy depends on how easy it is

for changes in the money supply to change interest rates. By changing interest rates, monetary policy affects investment
spending and the aggregate demand curve. The economies of
Albernia and Brittania have very different money demand
curves, as shown in the accompanying diagram. In which
economy will changes in the money supply be a more effective policy tool? Why?

To determine which economy will changes in the money supply be a more effective policy tool, we need to analyze their respective money demand curves as shown in the accompanying diagram. The economy with a steeper money demand curve will respond more significantly to changes in the money supply, making it a more effective policy tool.

To interpret the diagram, the horizontal axis represents the quantity of money, while the vertical axis represents the interest rate. The money demand curve shows the relationship between the interest rate and the quantity of money demanded.

If the money demand curve is relatively steep, it means that a small change in the quantity of money will have a larger impact on the interest rate. Consequently, changes in the money supply will lead to more significant changes in interest rates, ultimately influencing investment spending and aggregate demand in the economy.

Conversely, if the money demand curve is relatively flat, it indicates that a larger change in the quantity of money will be necessary to produce noticeable changes in the interest rate. This suggests that changes in the money supply will have a less substantial effect on interest rates, and thus, investment spending and aggregate demand.

By comparing the steepness of the money demand curves in the two economies, we can determine which one will respond more effectively to changes in the money supply as a policy tool. The economy with a steeper money demand curve will be more responsive to changes in the money supply and, therefore, have a more effective monetary policy tool.

Without access to the specific diagram and accompanying information, it is not possible to conclusively determine which economy has the steeper money demand curve and, therefore, which one has a more effective monetary policy tool.