expansionary monetary policy

(noun)

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.

Related Terms

Examples of expansionary monetary policy in the following topics:

  • The Effect of Expansionary Monetary Policy

    • An expansionary monetary policy is used to increase economic growth, and generally decreases unemployment and increases inflation.
    • Monetary policy is referred to as either being expansionary or contractionary.
    • A central bank can enact an expansionary monetary policy several ways.
    • Another way to enact an expansionary monetary policy is to increase the amount of discount window lending.
    • 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.

  • 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.

  • 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.
    • 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.
    • Identify how changes in monetary and fiscal policy can manage the business cycle, and why that is desirable

  • The Impact of Monetary Policy on Aggregate Demand, Prices, and Real GDP

    • This creates a relationship between monetary policy and aggregate demand.
    • Contractionary monetary policy decreases the money supply in an economy .
    • Expansionary monetary policy increases the money supply in an economy.
    • This graph shows the effect of expansionary monetary policy, which shifts aggregate demand (AD) to the right.

  • Executing Expansionary Monetary Policy

    • Central banks use monetary policy to stabilize the economy; during periods of economic slowing central banks initiate expansionary policy, whereby the bank increases the money supply in order to lower prevailing 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.

  • The Effect of Restrictive Monetary Policy

    • Monetary policy is can be classified as expansionary or restrictive (also called contractionary).
    • Restrictive monetary policy expands the money supply more slowly than usual or even shrinks it, while and expansionary policy increases the money supply.
    • Monetary policy focuses on the first two elements.
    • A central bank can enact a contractionary monetary policy several ways.
    • The primary means a central bank uses to implement an expansionary monetary policy is through open market operations.

  • Limits of Fiscal Policy

    • Two key limits of fiscal policy are coordination with the nation's monetary policy and differing political viewpoints.
    • Fiscal policy and monetary policy are the two primary tools used by the State to achieve its macroeconomic objectives.
    • Policy makers are viewed to interact as strategic substitutes when one policy maker's expansionary (contractionary) policies are countered by another policy maker's contractionary (expansionary) policies.
    • If they behave as strategic complements,then an expansionary (contractionary) policy of one authority is met by expansionary (contractionary) policies of other.
    • Also, it is worthy to note that fiscal and monetary policies interact only to the extent of influencing the final objective.

  • Monetary Policy and Fiscal Stabilization

    • But with inflation increasingly ravaging the economy, the central bank abruptly tightened monetary policy beginning in 1979.
    • The inflation rate did come down, however, and by the middle of the decade the Fed was again able to pursue a cautiously expansionary policy.
    • The growing importance of monetary policy and the diminishing role played by fiscal policy in economic stabilization efforts may reflect both political and economic realities.
    • Political realities, in short, may favor a bigger role for monetary policy during times of inflation.
    • One other reason suggests why fiscal policy may be more suited to fighting unemployment, while monetary policy may be more effective in fighting inflation.

  • The Taylor Rule

    • Taylor's rule was designed to provide monetary policy guidance for how a central bank should set short-term interest rates.
    • It was designed to provide monetary policy guidance for the Federal Reserve.
    • Expansionary policies with low interest rates are recommended by the Taylor rule in times when the economy is slow (i.e. unemployment is high, or inflation is low).
    • The Taylor rule fairly accurately demonstrates how monetary policy has been conducted under recent leaders of the Federal Reserve, such as Volker and Greenspan.
    • Stanford University Professor John Taylor is the creator of the Taylor Rule, a monetary policy instrument developed to promote stable economic growth and limit short-run economic disruption related to inflation.