Question

Nobel Prize winner Franco Modigliani found that the most important transmission mechanisms of monetary policy involve consumer expenditure. Describe how at least two of these mechanisms work.

Short answer

The transmission mechanism of monetary policy is the method by Franco Modigliani. It reduces the cost of financing durable goods by lowering the interest rate. An expansionary monetary policy reduces interest rates and the cost of financing durable goods, resulting in more consumer durable goods consumption.

It boosts the stock market's value and riches.

Step-by-step solution

Step 1. Concept of transmission mechanism of monetary policy 

The transmission mechanism of monetary policy is the method by which monetary policy impacts general economic circumstances and asset price levels.

Step 2. Explanation

The following is the procedure for two significant monetary policy transmission mechanisms:

It lowers the interest rate and the cost of financing durable items. An expansionary monetary policy lowers the rate of interest and the cost of financing durable goods, increasing consumer durable goods spending.

It raises the stock price and wealth. An expansionary monetary policy raises stock and wealth prices, increasing the number of resources available to consumers and thereby increasing consumption.