Monetary policy affects the economy with a long lag, in part becauseA. proposals to change monetary policy must go through both the House and Senate before being sent to the president.B. changes in interest rates primarily influence investment spending, and firms make investment plans far in advance.C. monetary policy works through changes in interest rates, and the Fed does not have the ability to change interest rates quickly.D. changes in interest rates primarily influence consumption spending, and households make consumption plans far in advance.

The central bank of the economy controls the monetary policy. The influence of the demand in the economy by managing the interest rates and the money supply by using open market operations and changing reserve ratio requirements.Option B is correct. Firms' investment decisions are made far in advance as they consider all possible avenues where they can invest their money and earn the highest possible return. This is a time-consuming process and hence has to be initiated well in advance. They use the interest rate as a discount rate to calculate the present value of any decision that they make. Thus a change in the interest rate will mean that the firm will have to conduct all of their financial analysis once more, accounting for the new interest rate. This can be a time-consuming process, and therefore changes in the interest rate will be slow to impact investment demand. Option A is incorrect. The Federal Reserve will independently control the economy's monetary policy and does not require approval from the House, Senate, or the President. Option C is incorrect. The Federal Reserve can choose to quickly change the interest rates by using open market operations, as this will change the amount of funds available to make loans. The change in the supply of liquid funds will change the interest rate in the market. Option D is incorrect. While consumers will consider the interest rate when choosing to make deposits or purchase expensive goods on credit, this spending is generally less sensitive to the interest rate than investment demand. Changes in interest rates through monetary policy are most likely to affect the investment component of the aggregate demand curve. This is because the interest rate is the primary determinant of any investment decision as it helps the firm account for the cost of capital and the time value of money.