Question

“Mechanics” of monetary policy and the economy ( I want the answer computer typing NOT handwriting)

Answer 1

“Mechanics” refers to the process through which monetary policy decisions affect the economy in general and the price level in specific. Thus can be defined as the channels, not mutually exclusive, through which the evolution of monetary aggregates affect, usually after variable although not completely predictable intervals, the level of prices and product.

There are mainly four different mechanisms through which monetary policy is able to influence the price level and the national income namely- the prices of financial assets, the interest rate, the domestic credit and the exchange rate

--An expansionary and contractionary monetary policy is able to exert strong upward/ downward pressure on financial assets prices, increasing/decreasing in the market value of companies in relation to the cost of capital and thus influencing the value of securities wealth of households

--Interest rates are set in a manner that the inflation target can be met in the future

--Domestic credit is a channel of transmission which is strictly related to the assets of commercial banks and particularly to the financing granted to the firms and to the securities portfolio

-- Monetary policy exerts a strong impact on the exchange rate. In specific, it has been noticed that an increase in the amount of currency in circulation would result in a reduction in the nominal interest rate, consequently leads to a negative differential between the domestic and the foreign interest rate