Some insights on macroeconomic equilibrium and the effects of a monetary expansion

The macroeconomic equilibrium.

The system is in macroeconomic equilibrium when the price level assumes a value (precisely equilibrium) such that the aggregate demand for goods and services is equal to the aggregate supply (point E).

What should we expect if the Central Bank decides to reduce the intervention interest rate (monetary expansion)?

This is a positive demand shock: the reduction in the intervention rate in fact leads to a reduction in interest rates which stimulates consumption and above all investment.

Graphically:

The AD curve shifts upward,

A new point of macroeconomic equilibrium is generated, characterized by a higher level of prices and a higher level of income.

A monetary expansion (reduction of the intervention rate) therefore entails:

An increase in prices (from P0 to P1),

An increase in income (from Q0 to Q1).

Furthermore:

• Interest rates are decreasing,

• Stock prices increase,

• The quantity of money in circulation increases.