Answer to Question #154670 in Macroeconomics for Fundiswa

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

Answer 1

Monetary transmission occur as follows:

↑ Money supply →↓ Interest rate → ↑ Investment → ↑ AD → ↑ Y(real GDP)

With the rise in money supply, interest rates fall. This makes the investment to rise as the cost of borrowing funds fall. The investment rise raises the aggregate demand which in turn increases output or real GDP.