Question

The interest-rate-based approach to the monetary policy transmission mechanism says that:______. a. a change in the money supply influences aggregate demand by changing consumer consumption behavior as they adjust to a change in the number of dollars available. b. a change in interest rates, which changes the money supply. c. leading to shifts of the short-run aggregate supply curve. d. a change in interest rates, which changes investment.

Answer 1

Answer:

d. a change in interest rates, which changes investment.

Explanation:

In economics, price of investment is interest rate. Therefore, a contractionary monetary policy will lead to higher interest rate and this will transmit to investment by reducing the level of investment as it now more expensive for investor to borrow loanable fund to invest.

On the other hand,  an expansionary monetary policy will lead to lower interest rate and this will transmit to investment by increasing the level of investment as it now cheaper for investor to borrow loanable fund to invest.