Question

2. Explain transition mechanism for the expansionary monetary policy by using florigen exchange market, bond market, market of money, and AS-Ad model.

Answer 1

Expansionary economic activity will increase the economic activity and the overall development. Expansionary economic activities through expansionary monetary policy and fiscal policy. This expansionary monetary policy will improve the financial condition. Through this the cost of money increase and it will leads to the increase in money supply will reduce the interest rate and induce investment and output. Among this monetary policy is the most efficient one. Because the fiscal policies will lead to wage inflation and also reduce the corporate margins.
The expansionary monetary policy will leads to increasing pressure in the bond market. Provide high pressure in the price of financial assets. It will increase the market value of firms with respect to cost of capital. These policies will increase the value of securities and wealth of the households. Thus the household consumption increased and depends on stock of wealth.
The expansion of monetary policy will increase the money circulation and reduce the nominal interest rate. This induces the demand for foreign currency. Thus there is high flow of foreign currency to domestic country and also leads to the depreciation of domestic currency. At the same time the demand for currency increased.
With expansionary monetary policy the aggregate supply curve shift out through increasing investment and output level. The higher level of output will induce growth and increase the consumption demand. It will leads to the shift of aggregate demand curve to the right