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The Impact of Monetary Policy on Aggregate Demand, Prices, and Real GDP
Aggregatedemand (AD) is the total demand for final goods and services in the economy at a given time and price level.
It specifies the amounts of goods and services that will be purchased at all possible price levels.
This is the demand for the gross domestic product of a country.
It is also referred to as the effective demand.
Contractionary monetary policy decreases the money supply in an economy .
The decrease in the money supply is mirrored by an equal decrease in the nominal output, otherwise known as Gross Domestic Product (GDP).
In addition, the decrease in the money supply will lead to a decrease in consumer spending.
This decrease will shift the aggregate demand curve to the left.
This reduction in money supply reduces price levels and real output, as there is less capital available in the economic system.
Expansionary monetary policy increases the money supply in an economy.
The increase in the money supply is mirrored by an equal increase in nominal output, or Gross Domestic Product (GDP).
In addition, the increase in the money supply will lead to an increase in consumer spending.
This increase will shift the aggregate demand curve to the right.
In addition, the increase in money supply would lead to movement up along the aggregate supply curve.
This would lead to a higher prices and more potential real output.
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Source: Boundless. “The Impact of Monetary Policy on Aggregate Demand, Prices, and Real GDP.” Boundless Economics. Boundless, 22 May. 2015. Retrieved 22 May. 2015 from https://www.example.com/economics/textbooks/boundless-economics-textbook/monetary-policy-28/impacts-of-federal-reserve-policies-119/the-impact-of-monetary-policy-on-aggregate-demand-prices-and-real-gdp-470-12566/