|Posted on April 18, 2014 at 10:40 AM|
When graphing a contractionary monetary policy (AKA tight monetary policy), it is a good idea to draw a money market graph and an AD/AS graph. A tight monetary policy makes most sense during periods of high inflation. The Fed will sell bonds on the open market (or increase discount rate or increase reserve ratio)
In the money market, you want to show a leftward shift of the vertical money supply curve. This will raise interest rates and decrease investment and consumer spending. As a result of the decrease in spending aggregate demand will shift to the left, decreasing RGDP, price level, and employment.
The No Bull Review graph below shows a contractionary monetary policy in the money market. As you can see, the policy raises the nominal interest rate.
AP Macroeconomics Unit 4 Monetary Policy