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Expansionary monetary policy is when the Federal Reserve is using its tools to stimulate the economy. This usually means lowering the Fed Funds rate to increase the money supply. This will cause mortgage rates to decline, consumers to borrow and spend, and businesses to grow, thereby hiring more workers who will consume even more. The opposite of this is contractionary monetary policy which is the Fed increasing interest rates to prevent possible inflation (Amadeo). The goals of expansionary monetary policy are to provide economic growth, high employment and stable prices. In addition to the goals, there are different channels of monetary policy that describe a banks’ ability and willingness to lend and borrowers’ net worth to explain how expansionary monetary policy works.
The government charges the Federal Reserve with maintaining sustainable economic growth, high employment and stable prices. To achieve these goals, the Fed constantly monitors the economy, either adding to or removing money from the system. This has the effect of lowering or raising interest rates. As boom times threaten to overheat the economy and cause inflation, the Fed pursues contractionary monetary policy, taking money out of the system and raising interest rates. During a recession, the Fed desires to spur the economy with an expansionary monetary policy, adding money to the system and lowering interest rates (Duff). Through expansionary monetary policy, economic growth is spurred by adding money to the economic system. It lowers interest rates and eases credit restrictions that banks apply to loan applications. This means consumers and businesses can borrow money more easily, leading them to spend more money. When consumers spend more money, businesses enjoy increased revenues and profits. This allows companies to update plant and equipment assets and to hire new employees. During a period of expansionary monetary policy, unemployment declines because companies find it...
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