Expansionary and Contractionary Monetary PolicyThe top portion shows what happens when the Fed adopts an expansionary monetary policy and increases the money supply. Interest rates fall, leading to higher investment spending, which raises income, which, in turn, raises consumer spending and shifts the AD curve to the right. The bottom portion shows what happens when the Fed adopts a contractionary monetary policy and reduces the money supply. Interest rates rise, leading to lower investment spending and a reduction in income. This lowers consumer spending and shifts the AD curve to the left.