Question

The LM curve on the right reflects the conduct of present-day monetary policy. The assumption underlying this curve is that the central bank chooses the ▼I then adjusts the to achieve it. Suppose the central bank determines that current economic conditions justify an increase in the interest rate. 1.) Using the line drawing tool, draw a second LM curve to reflect this policy change. Label your curve LM LM Carefully follow the instructions above and only draw the required object. Output, Y

Answer 1

An expansionary monetary policy shifts the supply curve to the right and reduces the interest rate, while a contractionary monetary policy shifts the supply curve to the left and increases the interest rate.

Step-by-step explanation:

An expansionary monetary policy occurs when the central bank increases the money supply or lowers interest rates to stimulate economic growth. In the market for loanable funds, this policy will shift the supply curve to the right, from the original supply curve (So) to the new supply curve (S1). As a result, the equilibrium interest rate will decrease from 8% to 6% and the quantity of funds loaned will increase from $10 billion to $14 billion.

Conversely, a contractionary monetary policy occurs when the central bank decreases the money supply or raises interest rates to control inflation. In the market for loanable funds, this policy will shift the supply curve to the left, from the original supply curve (So) to the new supply curve (S2). Consequently, the equilibrium interest rate will increase from 8% to 10% and the quantity of funds loaned will decrease from $10 billion to $8 billion.