Monetary Policy

Money Market
Unit 12.1 - Lesson 1

Learning Outcome:
Explain the Money Market graph in relation to the Money Supply and
Nominal Interest Rate.
Using a money market graph, illustrate expansionary and
contractionary monetary policy.
Explain how expansionary and contractionary fiscal policy influence
Aggregate Demand.

Money Market
Model used to show the total Supply and Demand for
money in an economy.
Liquid money available in an economy:
Checking accounts
Cash
Savings accounts
Price for money is the Nominal Interest Rate earned.
Represents the Opportunity Cost of holding on to
money.

Money Market Graph

Money Supply: determined by the Central
Banks Monetary Policy
Perfectly Inelastic
Money Demand: demand among
households & firms as an asset.
Inversely related to Interest Rate
Level of output in an economy can shift the
Demand curve
Higher levels of GDP - higher Incomes demand for money increases
Lower levels of GDP - lower Incomes demand for money decreases

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Money Market & Monetary Policy

Central Bank decreases the Supply of
Money
Money becomes more scarce.
Interest Rates Increase
Decrease in Investment Spending
Decrease in Consumption
Decrease in Aggregate Demand in an
Economy.

Contractionary Monetary Policy

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Money Market & Monetary Policy

Central Bank increases the Supply of
Money
Money becomes less scarce.
Interest Rates Decrease
Increase in Investment Spending
Increase in Consumption
Increase in Aggregate Demand in an
Economy.

Expansionary Monetary Policy

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