Figure 15.7 Monetary Policy and Interest Rates The original equilibrium occurs at E 0 . An expansionary monetary policy will shift the supply of loanable funds to the right from the original supply cu...Figure 15.7 Monetary Policy and Interest Rates The original equilibrium occurs at E 0 . An expansionary monetary policy will shift the supply of loanable funds to the right from the original supply curve (S 0 ) to the new supply curve (S 1 ) and to a new equilibrium of E 1 , reducing the interest rate from 8% to 6%. A contractionary monetary policy will shift the supply of loanable funds to the left from the original supply curve (S 0 ) to the new supply (S 2 ), and raise the interest rate from…
