Monetary Policy Graphs (2 of 2) - Macro 4.6

Mr. Clifford discusses the money market and its impact on aggregate demand, focusing on an inflationary gap where actual GDP exceeds potential GDP. The FED's role in adjusting the money supply to influence investment and aggregate demand is explained. A decrease in money supply raises interest rates, reducing investment and shifting aggregate demand left, closing the inflationary gap. The video also covers the FED's monetary policy tools: increasing reserve requirements, raising the discount rate, and selling bonds.

What happens to the money supply when the FED decreases it?

Explain how a decrease in the money supply affects interest rates and investment.

How does a higher interest rate influence firms' decisions regarding investment?

Describe the relationship between interest rates and aggregate demand.

What are the three methods the FED can use to decrease the money supply?