Monetary Policy Lab

Monetary Policy — Interest Rates & Money Supply

Monetary policy is conducted by central banks through changes in short-term interest rates or the money supply to achieve price stability and full employment. This simulator focuses on the monetary transmission mechanism — how a rate cut or money-supply expansion shifts the LM curve, lowers borrowing costs, stimulates investment, and ultimately affects output and inflation. Unlike fiscal policy (government spending/taxes) or the multiplier-effect model, monetary intervention operates through financial markets and credit channels.

What you can do in this simulation

• Increase or decrease the money supply and trace the resulting LM curve shift
• Set the policy interest rate and observe investment, consumption, and aggregate demand responses
• Combine monetary and fiscal policy and find the joint IS-LM equilibrium
• Simulate an open economy where monetary expansion also affects the exchange rate
• Apply a Taylor rule to automatically adjust the rate in response to inflation and output gaps

Concepts covered

LM curve · money supply · interest rate · Taylor rule · monetary transmission · exchange rate

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