Expansionary policy

Examples of Expansionary policy in the following topics:

• The Effect of Expansionary Monetary Policy

  • Monetary policy is referred to as either being expansionary or contractionary.
  • Expansionary policy seeks to accelerate economic growth, while contractionary policy seeks to restrict it.
  • Expansionary policy attempts to promote aggregate demand growth.
  • A central bank can enact an expansionary monetary policy several ways.
  • Another method of enacting a expansionary monetary policy is by decreasing the reserve requirement.

• Arguments For and Against Fighting Recession with Expansionary Monetary Policy

  • Expansionary monetary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates.
  • Expansionary monetary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into investing, leading to overall economic growth.
  • For example, if the central bank is implementing expansionary policy but is committed to keeping interest rates low, the central bank needs to convey this policy with credibility, otherwise economic agents may assume that expansionary policy will lead to inflation and begin augmenting behavior to initiate the outcome expected, higher inflation.
  • The increase in the money supply is the primary conduit for expansionary monetary policy.
  • Assess the value of discretionary expansionary monetary policy and the associated shortcomings.

• How Fiscal Policy Relates to the AD-AS Model

  • Expansionary policy shifts the aggregate demand curve to the right, while contractionary policy shifts it to the left.
  • Expansionary fiscal policy is used to kick-start the economy during a recession.
  • In pursuing expansionary policy, the government increases spending, reduces taxes, or does a combination of the two.
  • If government spending exceeds tax revenues, expansionary policy will lead to a budget deficit.
  • Expansionary policy shifts the AD curve to the right, while contractionary policy shifts it to the left.

• Arguments For and Against Fighting Recession with Expansionary Fiscal Policy

  • Expansionary fiscal policies, which are usually implemented during recessions, attempt to increase economic demand.
  • Expansionary fiscal policies are usually implemented during recessions because they attempt to increase economic demand, and as a result, increase economic output which is reduced during a recession.
  • Expansionary fiscal policies involve reducing taxes or increasing government expenditure.
  • Increasing government spending, creating a budget deficit, and financing the shortfall through debt issuance are typical policy actions in an expansionary fiscal policy scenario.
  • Due to the funding process of expansionary policy, there is a lack of consensus among economists with respect to the merits of fiscal stimulus.

• Executing Expansionary Monetary Policy

  • Central banks initiate expansionary policy during periods of economic slowing, increasing the money supply and reducing interest rates.
  • An active expansionary policy increases the size of the money supply, decreasing the interest rate.
  • In an expansionary policy regime, the Fed would reduce the reserve requirement.
  • Expansionary monetary policy will seek to reduce the fed funds target rate (a range).
  • In an expansionary policy regime, the Fed purchases government securities from a bank in exchange for cash.

• Managing the Business Cycle

  • If the economy needs to be slowed, these policies are referred to as contractionary and if the economy needs to be stimulated the policy prescription is expansionary.
  • Expansionary fiscal policy involves government spending exceeding tax revenue, and is usually undertaken during recessions.
  • Expansionary monetary policy relies on the central bank increasing availability of loanable funds through three mechanisms: open market operations, discount rate, and the reserve ratio.
  • Contractionary fiscal policy is opposite of the action taken in an expansionary purpose, and occurs when government spending is lower than tax revenue.
  • Similarly, contractionary monetary policy is the opposite of expansionary monetary policy and occurs when the supply of loanable funds is limited, to reduce the access and availability to relatively inexpensive credit.

• Introduction to Monetary Policy

  • Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it.
  • Expansionary policy is traditionally used to try to combat unemployment in a recession by easing credit to entice businesses into expanding.
  • Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing.
  • A monetary authority will typically pursue expansionary monetary policy when there is an output gap - that is, a country is producing output at a lower level than its potential output.
  • Expansionary monetary policy consists of the tools that a central bank uses to achieve this increase in aggregate demand.

• Long-Run Implications of Fiscal Policy

  • Expansionary fiscal policy can lead to decreased private investment, decreased net imports, and increased inflation.
  • Economists still debate the effectiveness of fiscal policy to influence the economy, particularly when it comes to using expansionary fiscal policy to stimulate the economy.
  • Some also believe that expansionary fiscal policy also decreases net exports, which has a mitigating effect on national output and income.
  • This is because, all other things being equal, the bonds issued from a country executing expansionary fiscal policy now offer a higher rate of return.
  • If a country pursues and expansionary fiscal policy, high inflation becomes a concern.

• Interest Rate Levels

  • Monetary policies are referred to as either expansionary or contractionary.
  • Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding.
  • An expansionary policy increases the total supply of money in the economy more rapidly than usual.
  • Most central banks around the world assume and expect that lowering interest rates (expansionary monetary policies) would produce the effect of increasing investments and consumptions.
  • Crowding out is a phenomenon occurring when expansionary fiscal policy causes interest rates to rise, thereby reducing investment spending.

• Expansionary Versus Contractionary Fiscal Policy

  • When the economy is producing less than potential output, expansionary fiscal policy can be used to employ idle resources and boost output.
  • Keynes advocated counter-cyclical fiscal policies (policies that acted against the tide of the business cycle).
  • This is known as expansionary fiscal policy.
  • The effects of fiscal policy can be limited by crowding out.
  • The government can implement expansionary fiscal policy through increased spending, such as paying for the construction of new highways.