Effects of an Expansionary Monetary Policy
The role of an expansionary monetary policy is that of increasing economic growth and commonly lessening unemployment and the increase in prices. The policy can be implemented in varying ways some of which are as highlighted below.
- The central bank can implement this policy by buying government bonds in an open market.
- The policy can also be enacted by increasing discount window lending amount
- Finally, it can be enacted by decreasing reserve requirement
The effects of this policy are varied and while this is the case the most common ones include the following:
The money injected into an economy when conducting market operations is used by consumers or alternatively used by businesses for purposes of hiring new workers or creating growth. This policy comes with low interest rates which make it affordable for consumers to purchase houses, cars and other items. What is more, it also leads to expansion of businesses. Low reserve requirements also make it possible for banks to issue more loans and this increases credit supply and lowers interest rates charged by banks.
This policy has the tendency to increase the prices of real estate and stock as well. Apart from increasing stocks demand through creation of additional money, reduction of bond prices accompanying this policy increases the attractiveness of bonds. Because of the low interest rates, consumers find it easier to buy new houses increasing real estate value. Most households have their wealth either in stocks or real estate which means an increase in the value of these two creates more wealth for households.
Whenever the interest rate in one country falls compared to that of other countries, the country with the best monetary policy experienced a fall in currency. When a nation’s currency decreases its value, exports become cheaper while the imports price increases consequently, boosting the economy of that nation further.
Though this policy is great for an economy that is depressed, it can also cause inflation or rise in prices especially in an economy that is close or at full capacity. This is attributed to the fact the increased money outstrips productivity capacity of that economy. This happens because often, there is a lag during the process of implementing the policy hence the impact is not felt immediately. Therefore, the Central Bank is supposed to judge accurately, not the current performance of the economy but rather, how it will be at some point in the future.
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