Impact of an Expansionary Monetary Policy:

Money supply will increase.

LM curve shifts to the right.

Income level will increase.


r will fall.

... r < r*

... Investors will invest abroad

CF will rise; ER will fall; NX will increase.

Expansionary Monetary Policy with IS-LM Model

Impact of monetary expansion:

Money supply increases


When r falls (r < r*)


CF rises from CF1 to CF2 (Fig. 17.8(b))


Investment abroad increases

When CF rises

ER depreciates from є1 to є2

NX rises from NX1 to NX2 (Fig. 17.8 (c))

(because of inverse relation between NX and ER)