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Monetary policy transmission mechanism refers to the process through which changes in monetary policy, such as adjustments in interest rates, reserve requirements, or liquidity provisions by the central bank, affect the broader economy, particularly aggregate demand, output, employment, and inflation. It is essentially the channel through which monetary policy decisions are transmitted to real economic variables. The effectiveness of monetary policy depends on how well and how quickly these changes influence spending and investment decisions by households and firms. The transmission mechanism operates with time lags and is influenced by the structure of the financial system, the behavior of economic agents, and the credibility of the central bank. One of the most prominent forms of transmission is the interest rate channel. When the central bank changes the policy rate, it affects the cost of borrowing in the economy. A reduction in the policy rate ______ __________ _____ ____ _____ _____ ____.
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