Monetary transmission mechanism
The monetary transmission mechanism is how things work when banks and other institutions use money to help the economy grow. Imagine if you have a piggy bank and you put some coins in it every week. When you have enough, you can spend the money on something you want, like a toy or some candy.
Similarly, banks collect coins and bills from many people and keep them safe in their piggy banks. They also lend the money to people who want to buy a car or a house, or start a business.
When the economy is not doing well, the government wants to help people and businesses have more money to spend. So, they tell the banks to lower the interest rates. This means that the banks can lend money to people at a lower cost.
When the banks lend more money, people can buy more things, and businesses can grow. When businesses grow, they hire more people, and those people have more money to spend. This cycle keeps going, and the economy grows.
However, if the banks do not have enough money to lend, then the economy may not grow. That is why the government tries to make sure that banks have enough money to lend by encouraging people to save their money in banks.
So, just like your piggy bank, the monetary transmission mechanism helps the economy grow by collecting and lending money, and when interest rates are low, people and businesses can use that money to buy things, grow, and create more jobs.
Similarly, banks collect coins and bills from many people and keep them safe in their piggy banks. They also lend the money to people who want to buy a car or a house, or start a business.
When the economy is not doing well, the government wants to help people and businesses have more money to spend. So, they tell the banks to lower the interest rates. This means that the banks can lend money to people at a lower cost.
When the banks lend more money, people can buy more things, and businesses can grow. When businesses grow, they hire more people, and those people have more money to spend. This cycle keeps going, and the economy grows.
However, if the banks do not have enough money to lend, then the economy may not grow. That is why the government tries to make sure that banks have enough money to lend by encouraging people to save their money in banks.
So, just like your piggy bank, the monetary transmission mechanism helps the economy grow by collecting and lending money, and when interest rates are low, people and businesses can use that money to buy things, grow, and create more jobs.