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How do you graph an expansionary monetary policy?

Posted on April 18, 2014 at 10:35 AM

When graphing an expansionary monetary policy (AKA easy monetary policy), it is a good idea to draw a money market graph and an AD/AS graph. An expansionary monetary policy makes most sense during a recession. The Fed will buy bonds on the open market (or decrease discount rate or decrease reserve ratio)

In the money market, you want to show a rightward shift of the vertical money supply curve. This will reduce interest rates and increase investment and consumer spending. As a result of the increase in spending aggregate demand will shift to the right, increasing RGDP, price level, and employment.

The No Bull Review graph below shows an expansionary monetary policy in the money market. As you can see, the policy lowers the nominal interest rate.

AP Macroeconomics Unit 4 Monetary Policy

Categories: AP Macroeconomics, Macro Unit 4 Monetary Policy

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