Answer to Question #307853 in Macroeconomics for Labeat Jasiqi

Question

according to the interest rate channel the traditional Keynesian, explain how a monetary tightening is transmitted to the real economy

Answer 1

Transmission mechanisms, according to Keynesians, are indirect. Changes in the money supply, in other words, affect aggregate demand through changes in interest rates and exchange rates.

Keynesians think that managing interest rates is the most important goal. This program is likely to result in a more consistent money demand. There are fewer speculative demand movements, which helps to keep interest rates under control. In addition, Keynesians argue that investment demand is interest-inelastic, particularly during a recession. Even large fluctuations in interest rates have little effect on investment. Fixed investment in plant and machinery, for example, is not especially interest-sensitive. Other components of investment demand, such as stock investments and bank-financed consumer demand, may, nevertheless, be interest-elastic leading to monetary tightening.