Answer to Question #147900 in Macroeconomics for Vuxaka Judy Maluleke

Question

Explain with an aid of a symbols the monetary transmission mechanism when interest rates increases

Answer 1

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 increases real interest rates, real interest rates increases real investment, and finally real investment growth increases national output.