The transmission mechanism
A)is the process by which fiscal policy affects aggregate demand
B)works best if money demand is completely interest elastic
C)fails if none of the components of aggregate demand responds to changes in interest rates
D)relates to the effects of tax rate changes on the fiscal multiplier
E)all of the above

Question

Quizplus · Accepted Answer

The transmission mechanism primarily refers to how monetary policy (not fiscal policy) affects the economy, particularly through changes in interest rates and their impact on aggregate demand. If none of the components of aggregate demand respond to changes in interest rates, then the transmission mechanism would indeed fail, as the central bank's policy changes would not affect economic activity.

The Transmission Mechanism