The Keynesian transmission mechanism for monetary policy asserts that changes in the money supply

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According to the Keynesian transmission mechanism, changes in the money supply affect real interest rates, which in turn influence investment and consumption, ultimately affecting the level of aggregate demand. This is because a change in the money supply can affect the supply of loanable funds, which in turn affects the equilibrium interest rate. A decrease in the money supply, for example, would lead to an increase in the interest rate, which would reduce investment and consumption, leading to a decrease in aggregate demand. Conversely, an increase in the money supply would lead to a decrease in the interest rate, resulting in an increase in investment and consumption, and ultimately an increase in aggregate demand.

The Keynesian Transmission Mechanism for Monetary Policy Asserts That Changes