Macroeconomics

‭G. Monetary Policy‬ ‭Demand-Side Efects of Monetary Policy‬

‭Since‬ ‭the‬ ‭Fed‬ ‭is‬ ‭a‬ ‭key‬ ‭macroeconomic‬ ‭player‬ ‭that‬ ‭can‬ ‭aid‬ ‭in‬ ‭closing‬ ‭output‬ ‭gaps‬ ‭to‬ ‭achieve‬ ‭macroeconomic‬‭objectives,‬‭the‬‭AD-AS‬‭model‬‭can‬‭also‬‭be‬‭used‬‭to‬‭illustrate‬‭the‬‭effect‬‭of‬‭monetary‬‭policy‬ ‭on‬‭the‬‭economy.‬‭Similar‬‭to‬‭fscal‬‭policy,‬ ‭monetary‬‭policy‬‭also‬‭targets‬‭aggregate‬‭demand‬‭to‬‭influence‬ ‭the macroeconomy; therefore, it is also considered a demand-side policy‬ ‭.‬ ‭Study Tip‬ ‭An‬‭expansionary‬‭monetary‬‭policy‬‭is‬‭also‬‭referred‬‭to‬‭as‬‭“easy”‬‭or‬‭“loose‬‭monetary‬‭policy”,‬‭whereas‬‭a‬ ‭contractionary monetary policy is referred to as “tight” or “restrictive monetary policy.”‬

‭Tools‬‭of‬‭monetary‬‭policy‬‭are‬‭usually‬‭used‬‭either‬‭to‬‭solve‬‭recessions‬‭associated‬‭with‬‭high‬‭unemployment‬ ‭levels (i.e., close recessionary gaps), or solve inflation (i.e., close inflationary gaps) as follows:‬

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