Monetary Policy and Aggregate Demand: Effects of Money Supply and Interest Rates

What is monetary policy?

Decisions on the money supply and the rate of interest taken to influence the economy.

What does an increase in the money supply lead to?

An increase in spending, which raises Aggregate Demand (A.D.) and output.

What is the definition of money supply?

All the money in an economy at any one time.

How does an increase in the rate of interest affect expenditure?

It leads to less expenditure, resulting in a decrease in Aggregate Demand (A.D.).

What is expansionary monetary policy?

A policy that involves increasing the money supply and the rate of interest to boost Aggregate Demand (A.D.) and economic growth.

What is contractionary monetary policy?

A policy that involves decreasing the money supply and increasing the rate of interest to combat high prices, leading to a decrease in Aggregate Demand (A.D.).

How can a rise in the foreign exchange rate affect exports and imports?

It can increase the price of exports and decrease the price of imports.