There is chain of events that occurs for expansionary and contractionary monetary policy to affect the long run equilibrium level of real gross domestic product.

Expansionary monetary policy is when central banks use their tools to stimulate the economy.This increases the money supply, which lowers the interest rates and increases demand.It promotes economic growth and provides possibility to make it easier for individuals or organizations to borrow and spend money.

Contractionary monetary policy is when banks slow economic growth.The purpose is to limit inflation.When inflation gets too high it is damaging.Higher interest rates mean more expensive loans.The general population is less likely to make big purchases like a home, or new vehicle.With higher interest rates businesses are unable to afford the cost for expansion.

Most important thing to remember is that the Fed wants the economy to grow, and that inflation has not been an issue for many years.Expansionary monetary policy promotes economic growth by lowering the interest rate which increases the aggregate demand.Expansionary monetary policy decreases the level of aggregate demand.

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