Question

Explain the importance of understanding monetary transmission mechanism

Explain the importance of understanding monetary transmission mechanism

Homework Answers

Answer #1
  • It involves channels to which the monetary policy decisions affect the Economy in general.
  • They guide Economic agents Expectations of inflation.
  • They influence price developments.
  • They affect both medium and long term interest rates.
  • They impact on Bank's monetary market and interest rates.
  • It describes how the policy induce changes in the nominal money stock.Impact real variables such as output and Employment.
  • Its key Assumption is that central bank liabilities include both components of monetary base that is currency and bank Reserves.
  • According to this mechanism,some friction in the Economy works to prevent nominal prices from adjusting immediately and proportionally to at least some changes in monetary base.
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