Question 1: Explain how monetary policy (expansionary or contractionary) is transmitted through the channels

listed below. Draw a schematic diagram with a 2-3 lines explanation. The answer should not exceed one page.

(Consult the book or online resources)

i. Interest rate (5)

ii. Exchange rate effect on net exports (5)

iii. Wealth effects (5)

iv. Bank lending (5)

Explaining why output decreases when interest rate increases. Include all the variables that are affected

through a policy change in the diagram and explain the reasons for their respective trends.)