Econ - Monetary And Fiscal Policy

Question 1

Monetary transmission mechanism

Answer 1

How change in monetary policy affects price level and inflation

Question 2

Effects of change to contradictory monetary policy (increased policy rate) - MTR

Answer 2

• Banks’ short term lending rates increase (decrease aggregate demand as consumers reduce credit purchases and business cut back on projects)
• Bond, asset and equity prices decrease (decreased consumption and increased spending)
• Decreased expenditures as expectations for future econ growth decrease
• Attract foreign investment in debt securities leading to domestic currency price appreciation - reduces demand for export goods from foreign countries.