Answer to Question #92278 in Macroeconomics for Tshepo Mfisa

Question

Briefly explain the concept “monetary policy transmission mechanism” and then illustrate how
changes in interest rates affects any business organisation of your choice. Substantiate your
answer fully.

Answer 1

Monetary policy transmission mechanismcan be defined as the change in interest rates which affects the aggregate demand and output price.

For instance, when England bank’s interests increases, then other banks will raise the amount they charge on loans and interests they are offering on savings. This will discourage firms from borrowing loans to fund businesses and encourage people to save instead of spending and this will depress the aggregate demand.