 Bismillahir Rahmanir Raheem we have completed two topics regarding transmission mechanism of monetary policy. One was regarding interest rate channel which is also known as traditional channel of monetary policy and secondly we have discussed other asset price channel. Now we move on to third type of transmission mechanism channel that is credit view or credit channel and as I have already discussed in the introduction of transmission mechanism of monetary policy there are different sub channels of this credit channel and we will discuss all of those but in this particular lecture we will focus on only one of them. So, first of all because this is our first lecture of credit view so the concepts in credit view that play a role I would like to explain to you first. Look at the market there is a symmetric information between lenders and borrowers. Now in the market there are some people who have funds available and they want to lend whereas some borrowers who have projects, business plan, business idea and they need financing so this means that they want to borrow and those who do not have the opportunity to do business but have funds they want to lend it. Now lenders and borrowers are two players of the financial markets there is asymmetric information between them. Asymmetric information means that some people who have a genuine business plan and they invest in it and earn profit and those who have lent it will also be given a return and they will also earn profit but the problem with asymmetric information is that the lender does not know that the borrower who is borrowing money from me, who is borrowing funds from me will invest it in a business that is not a risky business, it will not go into a dupe because it does not have the information of the borrower, it does not have the lender so this means that in both the information there is asymmetric information on one level it does not have the information of the borrower. This creates financial friction and before financial friction there are two important concepts that I want to explain to you, there are both the problems of the financial market one is moral hazard and one is adverse selection. I have explained adverse selection to some extent that the lender is not clear that the borrower will invest in a genuine project or put them in speculative activities that are risky and this business will be finished then how will he repay me. Now the borrower will never say that I am going to risky assets, I will invest in such a place where everything can be duped, he will only say that I have a good plan. Now the lender cannot differentiate which borrower will invest in genuine and which will invest in risky. So that is because he cannot select who is a good borrower, so we will say the problem of adverse selection, he can select the wrong person to lend his funds. Whereas moral hazard is on the other side and that is that a person who is a borrower to borrow funds says that I want to do a real investment, it is a very genuine project and it is possible that he is not pretending to be serious but he has a project in general but when he is borrowing it and he gets the funds then he thinks that the genuine investment will pay in a very long term, I will not take a return from this speculative activity, the funds are the ones that I got, so after getting the funds the behavior of borrower has changed, this is called moral hazard. So moral hazard is on the other side of the borrower and the lender is facing a problem in selection of borrower, this adverse selection will be there, now what are the reasons for this metric information, I do not know what kind of borrower this borrower belongs to. So far I do not know that tomorrow it will go back to its origin, i.e. with safe assets it will go towards risk investment, nothing will be clear, because of this metric information, the problems of adverse selection and moral hazard are made and because of these two, there is a financial friction, financial friction means that lending and borrowing are not smooth, there is friction in it, what is the result of this, the result is that the lending will go down, if the lending will go down then this means that investments will go down in the market, if investments will go down then aggregate demand will go down, so now you should understand a situation that there is a situation in which financial friction is there, i.e. asymmetric information is there, because of which moral hazard adverse selection problems are there and financial friction is there because of which lending is going down and investments are going down, this time we introduce a channel, because of which the problem of financial friction can be solved, if it is solved then the financial friction will go down, lending will go down, because of which investment will go down and ultimately aggregate demand will go down, now there is one bank lending channel and one balance sheet channel but in this lecture what we will discuss is bank lending channel, now here you have to understand that I have not said that the lending channel, I am saying the bank lending channel, in bank lending and in lending this is the difference that the problem in the moral hazard and adverse selection in the financial market is mentioned, there are borrowers, lenders, I did not take the name of the banks, this means that the lenders can be individuals too, or investment companies, or there can be some funds who have money and they want to give it to people, but the problem is that sometimes we do not select the wrong one, so remember that the bank lending channel means that the banks have their specialization in lending, lending institutions can be both, individuals can be lenders too, but the banks they specialize in lending, that means they specialize in lending institutions, why? You think that the business of the routine has a lot of know-how, that means the banks quickly judge whether this borrower will do the right investment or risk, or they have such ways in which they make sure that the borrower uses the funds properly, this means that banks specialized lending institutions are there, then because of the banks, financial frictions can come, but the banks need funds to lend, this means that monetary policy, if somehow the reserves of banks or the deposits of banks increase, then the banks are specialized in lending, then the effect of financial friction will decrease and the lending will increase and ultimately aggregate demand will increase, this is basically the channel, we will discuss it. The channel is that monetary policy, we always take it from the interest rate, what is still there, we have read that there are different tools of monetary policy and the central bank can affect the reserves through any tool, okay, whether they are borrowed reserves or non-borrowed reserves, somehow the reserves can affect, not one to one, 100% of that is not controlled, but through monetary policy, that bank reserves can affect, this is the first topic where we were reading the money supply, we will discuss it in detail, here I will just apply it, that is, monetary policy should change the bank reserves and we are specifically assuming that the bank reserves increase, the way to increase the bank reserves is that the required reserve ratio should decrease, for example, so the bank reserves of excess will increase and if the required reserve ratio increases, then the required reserves of the bank will increase, but you know that lending is through excess reserves, so we are assuming that the excess reserves of the bank increase, this means that the deposits of the bank have increased, now when you increase the deposits of the banks in your economy, then the financial market where the financial frictions were coming in the lending, then the banks which are specialized in lending and now they have the deposits, then the loans of the bank will increase and the loan increase of the bank means that loan will be taken and people will invest, then the investment will increase and the investment will increase and the aggregate demand will increase, so now you have seen a totally different channel, I have told you through bank lending and the role of financial frictions came and ultimately the investment and aggregate demand changed from this channel, this is what is in the transmission mechanism, that we take a new path in every transmission mechanism, our starting point is one, our goal is also one, starting point is monetary policy decision and end point is aggregate demand, but the channels are different, we can go in a different way, we can go in a different way, some banks go through lending, some exchange rate, some stock prices, but all these channels tell us that due to these reasons aggregate demand changes, that is the monetary policy change on the key basis.