Expansionary Monetary Policy
Expansionary monetary policy is described as a policy that increases the supply of money in a country for purposes of encouraging economic growth or fighting inflation. A good example of this kind of policy is the fiscal policy which takes the structure of rebates, increase in regime spending and tax cuts.
Also, such policies originate from central banks known to focus on the increase of money supply within an economy. The policy injects capital into an economy directly and also manages low periods of growth in business cycles. Whenever the Federal Reserve of the US reduces its rate of federal discount rate or funds, it uses this policy. Additionally, it also uses the policy whenever it buys treasury bonds in an open market. Consequently, capital is injected directly.
There are several advantages associated with expansionary monetary policy. It is implemented for purposes of stimulating the economy whenever a cycle of business contraction is expected. It also addresses unemployment problems within the system. Some of the advantages associated with the policy are as highlighted below:
- It leads to bond prices increase and interest rates reduction
- It decreases exchange rates leading to increased exports as well as decreased imports and consequently leading to balance of trade.
- Domestic bonds are made unattractive by the low interest rates and this decreases their demand while raising the demand for foreign bonds.
- Low interest rates leads to a high capital investment level.
During recession, an expansionary monetary policy is known to spur economic growth. By injecting money into the economic system, the interest rates are lowered easing restrictions on credit that banks apply to application of loans. As such, consumers as well as businesses are able to borrow money easily and at the same time spend more.
As consumers spend more, businesses also benefit by enjoying increased profits and revenues. This makes it possible for companies to update equipment and plant updates, as well as hire some new employees. When this policy is applied, the rate of unemployment goes down as well since companies can borrow money easily to expand operations.
This policy can also lead to inflation in cases where the economy is robust therefore creating surplus money. Majority of people wrongly believe inflation is the result of high prices while in fact, it arises where there is much money chasing the available services and goods thereby making money lose value in relation to products purchased. As a result, the price rises because consumers are competing for the products available which are offered to those who state the highest prices.
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