Wize University Macroeconomics Textbook > Monetary Policy

Monetary Injection in Closed and Open Economy

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Monetary Injection and AD

A monetary injection is when the central bank increases the money supply.


Image illustrating Monetary Injection and AD



  • When the money supply increases, the interest rates ________. This makes it ________ to take loans so Consumption (C) and Investment (I) ________
  • This causes Aggregate ________ to shift to the ________
Image illustrating Monetary Injection and AD




Net Exports

  • In a small open economy with a flexible exchange rate, a monetary injec­tion by the central bank that lowers interest rates will make domestic assets (like bonds) ________ attractive. This causes the dollar to ________ under a flexible exchange rate.
  • This causes net exports to ________
  • A monetary injection in an open economy shifts the aggregate demand curve ________ to the right than it does in a closed economy.
  • A fixed exchange rate is when the central bank does not allow the exchange rate to change between two countries.
  • If the central bank tries monetary injection (higher money supply and lower interest rates) with a fixed exchange rate, when the domestic interest rate falls below the world interest rate, everyone would try to buy ________ foreign assets (bonds).
  • To do this they would have to exchange their dollars to foreign currency at the central bank which would cause the money supply to ________ back to the original level
  • For this reason, monetary injection and monetary policy are effective with ________ exchange rates, but not ________ exchange rates.

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Monetary Injection with a Flexible/Fixed Exchange Rate


Flexible Exchange Rate



Image illustrating Monetary Injection with a Flexible/Fixed Exchange Rate



Image illustrating Monetary Injection with a Flexible/Fixed Exchange Rate



Fixed Exchange Rate