AP Macroeconomics

Monetary Policy: Connecting the Money Market to AD-AS

Monetary policy refers to actions taken by central banks to influence the money supply and interest rates. These policies affect aggregate demand through changes in investment and consumption spending, creating a chain reaction from money market shifts to AD-AS graph movements.

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Draw the Money Supply and Money Demand curves. Show the effect of an expansionary monetary policy (Open Market Purchase).

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Instructions

Draw the Money Supply and Money Demand curves. Show the effect of an expansionary monetary policy (Open Market Purchase).

To Do:

Show the initial equilibrium
Show the Money Supply shift
Label the new equilibrium interest rate
Label the new quantity of money

Check Your Understanding

Question 1 of 2

When the central bank buys bonds in open market operations, what happens to the money supply and interest rates?

Money supply increases, interest rates increase

Money supply increases, interest rates decrease

Money supply decreases, interest rates increase

Money supply decreases, interest rates decrease