Example: Monetary Restriction

key terms

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common currency

exchange rate

international trade


Monetary Policy - interest rate hike

In the late 1970s the Fed dramatically increased interest rates with a sharp reduction of the money supply. The high interest rate made loans needed to build new factories (investment) more expensive (as monthly payments on the loan would be higher). As a result, businesses decided to not build as many factories. Investment fell and the aggregate demand curve shifted to the left.

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