... spending to fall (I. This is a leftward movement along the the investment schedule from I0 to I1. Consequently, the aggregate demand and output fall (Y). Fig.1.(a), (b) and (c) explain the transmision. Under this framework, investment includes residential housing and consumer durable expenditure and business investment as well. The schematic of the distributional effects is: M, The transmission mechanism under this view works through the liability side of the bank balance sheets. Three conditions are necessary for the money channel to work. First, banks can not perfectly shield transaction balances from changes in reserves. Second, there is no close substitute for money in the conduct of transactions in the economy. Thirdly, it makes no difference which type of assets banks hold. Fig.2 shows the transmission through the major channels. The traditional view however has inefficiencies. Firstly, in the IS-LM analysis, the bond market is assumed to be in equilibrium. Banks have ...

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