Monetary Policy

Money Supply

The amount of money circulating in an economy

Monetary Policy

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

How can the Central Bank increase money supply?

• Printing more money

• Buying goverment bonds

• Encouraging commercial banks to provide more loans

How increase in Money Supply increases Aggregate Demand

Increase in Money Supply = More Borrowing = More Spending and Investment = Increase in AD = Increase in Output and Economic Growth

How Changes in Interest rates influence Aggregate Demand

Lower Interest Rates = More Borrowing = More Spending and Investment = Higher Aggregate Demand = Increase in AD

How changes in Foreign Exchange rate effect depriciation

Currency Depreciation = Exports Cheaper = Increase in Export Sales = Increase in AD

Expansionary Monetary Supply

When money supply is increased/interests rates are decreased in order to increase Aggregate demand

Contractory Money Supply

When money supply is decreased/interest rates are increased in order to decrease monetary supply