Question

Why are credit channels are important monetary transmission mechanisms? Explain the reasons for importance of credit channels

Answer 1

Ans

Monetary transmission mechanisms means the relationship between the monetary policy and the aggreagte demand. It is the process by which the aggregate demand are affected by the monetary poicy decisions.

Credit channel is important monetary transmission mechanisms due to the following reasons:

1. Credit channel shows a direct impact of monetary policy on the availabilty of credit to the consumers and firms which in turn affects the economy.

2. Credit channel for expansionary monetary policy shows that with the increase in supply of credit the more credit is available for distribution to business and consumers and so the investment increases which in turn increases the employment and also the aggregate demand that is output.

3. Credit channel for contractionary monetary policy shows that with the decrease in supply of credit the less credit is available for distribution to business and consumers and so the investment decreases which in turn decreases the employment and also the aggregate demand that is output.