Answer to Question #100396 in Macroeconomics for Patel

Question

How might the domestic transmission mechanism of monetary policy to inflation be weakened if long-term interest rates depend only on the balance between saving and investment at the global rather than domestic level?

Answer 1

The monetary transmission mechanism is the process by which asset prices and general economic conditions are affected as a result of monetary policy decisions. If long-term interest rates depend only on the balance between saving and investment at the global rather than domestic level, then monetary policy can be inefficient, because the long-run interest rate will depend not only on domestic monetary policy, but also on some global factors.