Refer to Figure 1 below and answer the question that follows: Figure 1: Monetary Policy Transmission Mechanism Which combination best fits into boxes 2, 3 and 4, respectively?

Question

BlackTom AI · Accepted Answer

Monetary policy works by changing the policy (target) cash rate, which then alters market interest rates and thereby investment spending.

1) Relevant knowledge points and concepts
- Central bank adjusts monetary policy by changing the target/cash (policy) rate.  
- The policy (target cash) rate influences short-term interbank rates and then other market interest rates (loan rates, mortgage rates, bond yields).  
- Higher/lower interest rates change the cost of borrowing and the return on saving, so they directly affect private investment (and durable consumption), aggregate demand and output.  
- Fiscal items like government spending or the budget deficit are separate (fiscal policy) and not part of the standard monetary transmission chain.

2) Step-by-step reasoning
- Box 1 is “Change in monetary policy.” The immediate instrument a central bank uses is the target cash (policy) rate: that is the natural next box (box 2).  
- A change in the target cash rate passes into the economy as changes in market interest rates: interbank, lending, mortgage, and bond rates move in response (box 3).  
- Those changed interest rates alter firms’ and households’ borrowing costs and incentives; therefore investment spending (and big-ticket consumption) adjusts (box 4).

3) Calculations
- No numerical calculation is required here; the mechanism is conceptual and causal.

4) Why the correct answer is correct
- Option (a) matches the canonical chain: monetary policy → target cash rate → interest rates → investment. This is the textbook monetary transmission mechanism.

5) Why other options are incorrect
- (b) and (c) introduce government spending or budget deficit—these are fiscal, not part of the monetary transmission chain.  
- (d) reverses the causal order (puts investment before interest rates), but investment responds to interest rates, not the other way around.

Conclusion: The correct sequence is option a (Change in target cash rate, Change in interest rates, change in investment), which matches the provided answer.

Refer to Figure 1 below and answer the question that follows: Figure 1: Monetary Policy Transmission Mechanism Which combination best fits into boxes 2, 3 and 4, respectively?单项选择题

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