Final answer:
Expansionary monetary policy increases aggregate demand, while tight monetary policy decreases it. Contractionary monetary policy increases aggregate demand initially to fight inflation, but eventually leads to a decrease. Loose monetary policy decreases aggregate demand to control inflation.
Step-by-step explanation:
The effects of expansionary, tight, contractionary, and loose monetary policy on aggregate demand can be summarized as follows:
- Expansionary monetary policy increases aggregate demand. When the central bank implements expansionary policy, it lowers interest rates, making it cheaper for businesses and individuals to borrow money. This stimulates investment and consumption, leading to an increase in aggregate demand.
- Tight monetary policy decreases aggregate demand. Tight policy is characterized by an increase in interest rates, which makes borrowing more expensive. As a result, businesses and individuals will reduce their borrowing and spending, leading to a decrease in aggregate demand.
- Contractionary monetary policy increases aggregate demand. This policy is aimed at fighting inflation by raising interest rates. The higher interest rates make borrowing more costly, and businesses and individuals will reduce borrowing and spending. However, this decrease in demand will eventually lower inflationary pressures and stabilize the economy.
- Loose monetary policy decreases aggregate demand. With a loose policy, interest rates are lowered to stimulate borrowing and spending. However, if borrowing and spending increase too much, it can lead to inflationary pressures. To control inflation, the central bank may adopt a tighter policy, leading to a decrease in aggregate demand.