monetary policy and the interest rate controlling the supply of money
TRANSCRIPT
Monetary Policy and the Interest Rate
Controlling the Supply of Money
Increasing the Money Supply: Effect on the Interest Rate
Interest rate, r
Quantity ofmoney
An increase in the money supply…
r1
r2
E1
MS1
1
MS2
2
MD
E2
…leads to a fall in the interest rate.
Monetary Policy and Aggregate Demand
Contractionary monetary policy causes the aggregate demand curve to shift to the left (from AD1 to AD3).
Expansionary monetary policy causes the aggregate demand curve to shift to the right (from AD1 to AD2).
AD2AD3 AD1
Aggregate Price Level
Real GDP