Transmission mechanism
Definition. The transmission mechanism is the chain of cause and effect through which a change in monetary policy works its way through the economy to affect output, employment, and the price level. It traces how policy moves from the initial instrument to the final macroeconomic goals.
In an interest rate based economy it runs from interest rates to borrowing, investment, and consumption. In Singapore the mechanism works mainly through the exchange rate, which affects import prices, export competitiveness, and aggregate demand.
This term belongs to Monetary Policy in A Level Economics. Read the full chapter for the diagrams, worked examples and exam technique.
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