QUESTION THREE [20] The monetary transmission mechanism is the process through which monetary policy decisions affect the economy in general and the price level in particular. In terms of the above statement evaluate the monetary transmission mechanism based on the diagram below.

(a) Interest rate Eo Ai 11 0 Investment spending (b) Prices and wages fixed (c) Prices and wages variable 4 P A = Y A1 ASo T AA Ao Price level Aggregate spending AP Eo A/ Eo AAD AD1 450 AY ADo Y Y 0 Yo Y1 0 Yo Y1 Total production, income Total production, income