which monetary policy affects the economy is through the cash flow channel.This is closely related to the previous one but it refers to the effect of interest rates not on the incentive to spend, but on the amount of cash available for spending. Again, it is useful to distinguish between households and businesses.
A third possible channel for the effects of monetary policy works through money and credit. The standard description of this mechanism is that a tightening of monetary policy makes it more difficult for borrowers to obtain loans, and thereby directly constrains their spending.
Interest rate changes can affect asset values, which in turn affect people's wealth and therefore their spending decisions. There are several classes of assets through which this type of mechanism might be thought to work: houses, property investments, shares or other financial investments.
Fluctuations in the exchange rate affect the economy by changing the relative prices of domestically-produced and foreign-produced goods and services. From the point of view of monetary policy management, exchange rate fluctuations are important in two ways. First, they directly affect the price level. For example, a depreciation of the exchange rate makes imported goods more expensive, and, since imported goods make up a significant proportion of domestic spending, this will have an effect on the average price of goods purchased