Macroeconomics for Dummies (UK Edition) by Manzur Rashid & Peter Antonioni

Author:Manzur Rashid & Peter Antonioni
Language: eng
Format: mobi
ISBN: 9781119026686
Publisher: Wiley
Published: 2015-10-14T00:00:00+00:00

Contractionary monetary policy

To carry out a contractionary monetary policy, the central bank reduces the money supply (typically by selling government bonds; for more on the exact process, flip to Chapter 10). The reduction in the money supply drives up the interest rate. A higher interest rate means lower consumption, investment and net exports, and because these are all components of aggregate demand, AD falls. We don’t reproduce all the diagrams for these because they’re exactly the opposite of the expansionary monetary policy ones! We show the AD–AS diagram for contractionary monetary policy in Figure 9-12.

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