Question

1. Provide a description of expansionary monetary policy.

Answer 1

An expansionary monetary policy is focused on increasing the aggregate demand in the economy. This is done by reducing the rate of interest which increases investment spending consumption spending and therefore aggregate spending.

To achieve this, the central authority of the economy, which is the central bank, targets federal funds rate, which is the rate of interest at which the commercial banks borrow loan from each other. When this target is reduced, banks are able to have a greater amount of excess reserves. This indicates that they will reduce the rate of interest for borrower and this is expected to increase investment and consumption spending.

Reduction in the federal funds rate can be achieved by conducting open market purchases of government securities, reducing the reserve requirements or by reducing the discount rate. These are the three tools of monetary policy which can be used to expand the money supply