34-1c Monetary Policy and Aggregate Demand What is monetary policy? Goals? Tools?
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14
The Effects of Reducing the Money Supply
Y
P
M
Interest
rate
AD
1
MS
1
MD
P
1
Y
1
r
1
MS
2
r
2
The Fed can raise
r
by reducing the money supply.
An increase in
r
reduces the quantity of g&s demanded.
