Question 1

Explain in detail the process of Monetary Policy transmission of a decrease in the cash interest rate. Use relevant graphs to describe how a Central Bank's action on the interest cash rate ripple through the economy and lead to the target policy goal.

Three connected diagrams should be used: (1) money supply and demand (2) investment demand schedule (3) AS/AD diagram. Interest rates is the variable that connects the first and second diagram.

Assumption:

The provided answer needs to make an explicit assumption about the range of the aggregate supply curve (horizontal, price sensitive or vertical).