Give a brief description of the transmission mechanism, Macroeconomics

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Give a brief description of the transmission mechanism

1. When the central bank target rate increases, other interest rates in the economy will increase (and the money supply will decrease, but that is not important here).

2. With higher interest rates, it is more expensive to borrow and more advantageous to save. Therefore, consumption and investment will decrease (we say that the central bank "cools off" the economy).

3. As consumption and investment fall, GDP is reduced and unemployment will rise. This will cause inflation and the growth rate in wages to fall.

 


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