14. IS/LM: Dynamic effects of monetary contraction

Interacting with graphs to learn more about the dynamic effects of a monetary contraction

We know that a monetary contraction lowers output and raises interest rates. But, this doesn′t all happen immediately. Some markets reach their new equilibrium faster than others do. For example, the market for government bonds is one of the most efficient markets in the world, and reaches equilibrium within seconds of changes in demand and supply. But, it is reasonable to assume that output does not react nearly as quickly. Let's see what this implies about the dynamic effects of a monetary contraction.

Objectives

• Illustrate the dynamic effects of monetary policy using the IS/LM diagram

Click on the 'Exploration' link above to continue.