Page 191 - DECO402_Macro Economics

Macroeconomic Theory

Notes Self Assessment
Fill in the blanks:
1. Monetary Authorities, in the form of equipment of monetary policy ................... the rate of
interest.
2. From the rise in money supply, LM curve shifts towards .....................

21.2 Monetary Policy and AD

We study such situation in which Monetary Authorities, in the form of equipment of monetary policy
determine the rate of interest (instead of money supply). When interest rate is reduced then it is the
indication of expansionary monetary policy and when interest rate is increased then it is the indication
of contractionary monetary policy. We have known from IS-LM Model that the rise in ‘r’ is related
with the reduction in money supply while the reduction in ‘r’ is related with the rise in money supply.
Therefore, when ‘r’ is increased then it indicates the contraction in money supply in economy when
‘r’ is reduced then it indicates the expansion in money supply. From the rise in money supply, LM
curve shifts towards right side and it shifts the AD curve towards right side on the definite price level.
Similarly, the reduction in money supply shifts LM curve towards left side and it shifts the AD curve
towards left side on the definite price level. Undoubtedly, when AD shifts towards right then there
is rise in actual GDP and when AD shifts towards left, then there is reduction in actual GDP.

Notes From the rise in money supply, LM curve shifts towards right side and it shifts
the AD curve towards right side on the definite price level.

Self Assessment
Multiple Choice Questions:
3. When AD shifts towards left then there is ............... in actual GDP.
(a) reduction (b) excess
(c) rise (d) none of these
4. In Contractionary Fiscal Policy, the IS Curve shifts .......................
(a) backward (b) forward
(c) upward (d) downward
5. The purpose with the investment demand function is from the ................... relationship
between investment and interest rate.
(a) favorable (b) inverse
(c) deep (d) none of these
6. The IS curve .......................... from the change in any of the autonomous components of total
expenditure.
(a) faces a barrier (b) shifts
(c) leakage (d) none of these

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