Question

1. Illustrate expansionary monetary policy. Be sure to include the Federal Reserve, banks, and the impact of money and interest rates. Need assistance with graphing the expansionary monetary policy.

Answer 1

IS AD,

When the Fed carries out monetary expansion, they expand the money supply. This is done by using open market operations that involve buying and selling of securities, as a primary tool. The Fed keeps the interest rates low to encourage borrowing by firms, people, and banks. This boosts economic activity, which is why the monetary expansion is done in the first place.

AD curve can shift due to monetary policy also. Monetary expansion could be in the form of increase in nominal money supply. As nominal money supply increases, the LM curve shifts rightward, and due to transmission mechanism, interest rate decreases and simultaneous equilibrium level of income increases. therefore, AD curve shifts rightward.

However, the point to note is that the shift is not parallel but proportionate. It means that the vertical gap between the AD curves will reduce as output level increases.