Question

Explain the links by which changes in monetary policy affects spending and thus output, employment, and prices?

Answer 1

Lets take an example of the increase in the monetary policy.

An increase in the monetary supply will lead to an excess supply of money in the market, with a higher moneys supply in the market people will have more money, with extra money they will spend more and save more, with the higher supply in the market the interest rate will fall.

At a lower interest rate the investment in the market will increase, at a higher investment firms will undertake more economic activity and employment will rise, At a higher employment level, the income of the people will increase and they will demand more, that will again increase the price in the market.

So, an increase in the money supply will decease the interest rate, increase the employment and increase the price,