User:Jaimyjames/sandbox

""Expansionary monetary policy"" is a form of macroeconomic policy aimed at lowering interest rates by increasing the size of the money supply to achieve economic growth or combat inflationary price increases. In most nations, monetary policy is controlled by either a central bank or a finance ministry.

Contrariwise, contractionary monetary policy seeks to reduce the size of the money supply.

Another form of expansionary policy is fiscal policy which comes in the form of tax cuts, transfer payments, rebates and increased government spending.

Theory
Within the vast majority of modern nations, special institutions exist which are tasked with monitoring and executing the monetary policy and often independently of the executive. Monetary policy rests on the relationship between the rates of interest in an economy and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate. For example, expansionary monetary policy could be implemented by central banks to help an economy grow during recessions. There are three ways available to achieve these ends in monetary policy: adjusting interest rates, the monetary base, and reserve requirements. An expansionary policy increases the size of the money supply more rapidly, or decreases the interest rate. The central bank influences interest rates by expanding or contracting the monetary base, which consists of currency in circulation and banks' reserves on deposit at the central bank. The primary way that the central bank can affect the monetary base is by open market operations or sales and purchases of second hand government debt, or by changing the reserve requirements.

If the central bank wishes to lower interest rates, which is executing expansionary monetary policy with the aim to increase money supply, it purchases government debt, thereby increasing the amount of cash in circulation or crediting banks' reserve accounts. Alternatively, it can lower the interest rate it charges on loans to commercial banks. If the interest rate on such transactions is sufficiently low, commercial banks can borrow from the central bank to meet reserve requirements and use the additional liquidity to expand their balance sheets, increasing the credit available to the economy. A third alternative is to lower reserve requirements, which frees up funds for banks to increase loans or buy other profitable assets. The presumed mechanics behind this are based on the assumption that lower interest rates (due increased money supply) promote aggregate demand growth. Specifically, consumption and investment are targeted to be increased in growth. By increasing the amount of money in the economy, the central bank encourages private consumption. Increasing the money supply also decreases the interest rate, which encourages lending and investment.

The second way to enact an expansionary monetary policy is to increase the amount of discount window lending. The discount window allows eligible institutions to borrow money from the central bank, usually on a short-term basis, to meet temporary shortages of liquidity caused by internal or external disruptions. Decreasing the rate charged at the discount window, the discount rate, will not only encourage more discount window lending, but will put downward pressure on other interest rates. Low interest rates encourage investment. The third method of enacting a expansionary monetary policy is by decreasing the reserve requirement. All banks are required to have a certain amount of cash on hand to cover withdrawals and other liquidity demands. By decreasing the reserve requirement, more money is made available to the economy at large.

Critique
It is important for policymakers to make credible announcements. If private agents (consumers and firms) believe that policymakers are committed to growing the economy, the agents will anticipate future prices to be higher than they would be otherwise. The private agents will then adjust their long-term plans accordingly, such as by taking out loans to invest in their business. But if the agents believe that the central bank's actions are short-term, they will not alter their actions and the effect of the expansionary policy will be minimized.

Furthermore, Neoclassical and Keynesian economics significantly differ on the effects and effectiveness of monetary policy on influencing the real economy; there is no clear consensus on how monetary policy affects real economic variables (aggregate output or income, employment). However, both economic schools accept that monetary policy affects monetary variables (price levels, interest rates).