The monetarist transmission mechanism, through which monetary policy affects the price level, real GDP and employment, depends on the:
A) indirect impact of changes on the interest rate.
B) indirect impact of changes on profit expectations.
C) direct impact of changes in fiscal policy on aggregate demand.
D) direct impact of changes in the money supply on aggregate demand.

Question

Quizplus · Accepted Answer

The monetarist transmission mechanism relies on the direct impact of changes in the money supply on aggregate demand, which then affects the price level, real GDP, and employment. By increasing the money supply, interest rates are lowered, which in turn stimulates investment and consumption, increasing aggregate demand. This mechanism is based on the quantity theory of money, which states that changes in the money supply have a proportional effect on the price level in the long run.

The Monetarist Transmission Mechanism, Through Which Monetary Policy Affects the Price