2 Lessons about monetary policy ■ Monetary policy affects output by affecting one (or more)of the components of aggregate demand: closed economy:个M→↓r→↑I→↑Y small open economy:个M→↓e三↑WX三个y Expansionary money policy does not raise world aggregate demand,it shifts demand from foreign to domestic products. Thus,the increases in income and employment at home come at the expense of losses abroad. CHAPTER 12 Aggregate Demand in the Open Economy slide 13 slide 13 § Monetary policy affects output by affecting one (or more) of the components of aggregate demand: closed economy: M  r  I  Y small open economy: M  e  NX  Y § Expansionary money policy does not raise world aggregate demand, it shifts demand from foreign to domestic products. Thus, the increases in income and employment at home come at the expense of losses abroad. 2