- Expansionary monetary policy is a tool central banks use to stimulate a declining economy and GDP.
- The Federal Reserve has three expansionary monetary policy methods: lowering interest rates, decreasing banks’ reserve requirements, and buying government securities.
- Expansionary monetary policy’s aim is to make it easier for individuals and companies to borrow and spend money — actions that all stimulate the economy.
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Modern, capitalist economies go through regular fluctuations of growth, contraction, and eventual recovery. This repeating nature of the economy is known as a business cycle.
During the contractionary phase, gross domestic product (GDP) is decreasing, which can lead to a prolonged period of economic decline. To combat the slowdown, a nation’s central bank will stimulate growth through an expansionary monetary policy.
What is expansionary monetary policy?
Expansionary monetary policy is a macroeconomic tool that a central bank — like the