Answer to Question #146971 in Macroeconomics for elvis

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.) (10)

Answer 1

A decrease in money supply in the economy increases the rate interest in the money market to E₁. This increases in the rate of the interest rate will reduce the investment spending to E₂. A reduction in the investment spending will reduce the aggregate expenditure and shift AD leftwards to AD₁ leading to a decrease in price level and national income in the economy.