Distinction Between Expansionary And Contractionary Monetary Policy
Economics notes
Distinction Between Expansionary And Contractionary Monetary Policy
➡️ Interest rates: Central banks can use interest rates to influence the cost of borrowing money, which in turn affects the amount of money available in the economy. This can be used to stimulate economic growth or to slow it down.
➡️ Money supply: Central banks can also influence the money supply by increasing or decreasing the amount of money in circulation. This can be done through open market operations, where the central bank buys or sells government bonds.
➡️ Credit regulations: Central banks can also use credit regulations to influence the amount of money available in the economy. This includes setting limits on the amount of money banks can lend, as well as setting minimum capital requirements for banks.
What is expansionary monetary policy and how does it work?
Expansionary monetary policy is a type of monetary policy that is implemented by a central bank to stimulate economic growth and increase the money supply. This is done by lowering interest rates, increasing the money supply, and encouraging borrowing and spending. The goal of expansionary monetary policy is to increase aggregate demand and boost economic activity.
What is contractionary monetary policy and how does it work?
Contractionary monetary policy is a type of monetary policy that is implemented by a central bank to slow down economic growth and reduce inflation. This is done by raising interest rates, decreasing the money supply, and discouraging borrowing and spending. The goal of contractionary monetary policy is to decrease aggregate demand and prevent the economy from overheating.
What are the advantages and disadvantages of expansionary and contractionary monetary policy?
The advantages of expansionary monetary policy include increased economic growth, increased employment, and increased consumer spending. However, the disadvantages include the risk of inflation, the risk of asset bubbles, and the risk of a trade deficit. The advantages of contractionary monetary policy include reduced inflation, reduced risk of asset bubbles, and reduced risk of a trade deficit. However, the disadvantages include decreased economic growth, decreased employment, and decreased consumer spending.