The linkages of the interest-rate-based transmission mechanism of monetary policy are summarized as follows:

Question

Quizplus · Accepted Answer

The interest-rate-based transmission mechanism of monetary policy operates through the following chain of events: a change in the money supply leads to a change in interest rates, which affects planned investment by firms and households, and in turn impacts aggregate demand. Thus, option C, which indicates this sequence of events, is the best choice. Option A is incorrect because it includes speculative balances, which are not directly affected by changes in the money supply. Option B is incorrect because it suggests that changes in government spending are a part of the interest-rate-based mechanism, which is not necessarily the case. Option D is incorrect because it includes transactions balances and government spending, which are not necessarily affected by changes in the interest rate.

The Linkages of the Interest-Rate-Based Transmission Mechanism of Monetary Policy