Monetary Policy Simulator
Monetary policy is when a central bank changes interest rates or other monetary conditions to influence aggregate demand, inflation, unemployment, and economic growth.
Interest rates → aggregate demand
Diagram shifts are slightly exaggerated for educational clarity. Not numerical forecasts. E₁ and E₂ are short-run equilibria. LRAS marks potential output; sustainable capacity is unchanged by this demand-side policy.
A lower price level than the counterfactual does not necessarily mean falling prices over time. This static graph illustrates pressure on inflation, not an inflation-rate forecast.
The transmission mechanism
Short-run responses and, when selected, the fully adjusted endpoint.
- 01Interest rate remains at 5%
- 02No interest-rate stimulus or restraint in this model
- 03AD and the initial equilibrium remain unchanged
When Would This Be Used?
Lower rates can encourage consumption and investment, supporting aggregate demand and reducing cyclical unemployment. Weak confidence or damaged banks may limit the response.
In Short Run, the situation sets the starting output and SRAS slope. Less spare capacity means a larger price effect and smaller output effect. Long Run instead compares fully adjusted outcomes at potential output.