How does monetary policy affect the equilibrium level of real GDP?
Monetary policy refers to controlling the money supply. An increase in the money supply decreases interest rates, which increases consumption and investment. The increases in consumption and investment increase aggregate demand, which increases the equilibrium level of real GDP. A decrease in the money supply increases interest rates, which decreases consumption and investment. The decreases in consumption and investment decrease aggregate demand, which decreases the equilibrium level of real GDP. So increases in the money supply are expansionary, whereas decreases in the money supply are contractionary. • What does the ECB do? The ECB is the central bank of the 12 nations adopting the euro as their national currency. As such, it conducts monetary policy for the euro region.
