The monetary transmission mechanism works through the effects of changes in the money supply on:
A) the budget deficit.
B) investment.
C) government expenditures.
D) taxation.

Question

Quizplus · Accepted Answer

The monetary transmission mechanism works through the effects of changes in the money supply on investment. When the central bank increases the money supply, interest rates drop making borrowing cheaper, and this encourages firms to increase investment spending. Conversely, when the central bank contracts the money supply, interest rates rise making borrowing more expensive, and this discourages firms from investing. Changes in the money supply do not directly influence the budget deficit, government expenditures, or taxation.

The Monetary Transmission Mechanism Works Through the Effects of Changes