Monetary Policy

Money Supply

Total amount of money circulating in an economy

Monetary Policy

Decisions made by the central bank on the money supply, interest rates and foreign exchange rates to influence aggregate demand

Money Supply

Increase in Money Supply = More Borrowing = More Spending Investment = Increase in Aggregate Demand = Economic Growth

Interest Rates

Reduced Interest Rates = More Borrowing = More spending = Higher AD = Economic growth

Foreign Exchange Rate

Currency Depreciates = Exports get cheaper = Imports become more expensive = Increase in export Sales = Increase in Aggregate Demand = Economic Growth

Expansionary Monetary Policy

When central bank increases money supply and reduces interest rates to increase aggregate demand

Contractionary Monetary Policy

Cuts in the money supply or growth Of the money supply and/or rises in the rate Of interest designed to reduce aggregate demand.