Depository institutions (DIs) play an important role in the transmission of monetary policy from the central bank (Reserve Bank of Australia) to the rest of the economy primarily because:

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Depository institutions, also known as banks or financial institutions, play a crucial role in the transmission of monetary policy because the deposits they hold are a major portion of the money supply. When the Reserve Bank of Australia adjusts monetary policy, such as changing interest rates or increasing the money supply, the impact is felt through the actions of depository institutions. For example, if interest rates are lowered, banks may offer lower rates on deposits and reduce rates on loans, encouraging borrowers to take out more loans, which increases the money supply. Therefore, changes in the monetary policy of the central bank have a direct effect on the lending and deposit activities of depository institutions, which in turn affects the overall economy.

Depository Institutions (DIs) Play an Important Role in the Transmission