Answer to Question #146850 in Macroeconomics for Nomfundo

Question

The monetary transmission mechanism can be depicted in the form of a graph
or using symbols.
Explain, with the aid of symbols, the monetary transmission mechanism when
interest rates increase
(Note: Prices and wages are variable.)

Answer 1

$$Solution$$

The monetary transmission mechanism shows channels through which monetary policy affect the economy. Monetary policy affect national output and general price level by influencing variables such as interest rate, exchange rates, credit, monetary aggregates, and asset prices.

This, is described symbolically as follows:

$M\uparrow \space \Rightarrow \space r \uparrow \space \Rightarrow \space I \uparrow \space \Rightarrow \space Y \uparrow$ where,

M is money supply, r is real interest rate, I is real investment, and Y is real output.

Thus, monetary policy increase money supply, money supply growth increses real interest rates, real interest rates increases real investment, and finally real investment growth increases national output.