Democracy

What is the difference between contractionary and expansionary monetary policy? What are the pros and cons of using contractionary and expansionary monetary policy tools under recession, or robust economic growth?

An expansionary monetary policy (e.g., decrease in interest rates) increases the supply of money. An expansionary monetary policy might be used during a recession to encourage banks to extend credit to consumers and entrepreneurs. A contractionary monetary policy (e.g., increase in interest rates) would conversely shrink the money supply, and might be used to prevent or control inflation during a period of economic growth.

One Response

1. HL Says:
   February 26th, 2010 at 10:54 am

   An expansionary monetary policy (e.g., decrease in interest rates) increases the supply of money. An expansionary monetary policy might be used during a recession to encourage banks to extend credit to consumers and entrepreneurs. A contractionary monetary policy (e.g., increase in interest rates) would conversely shrink the money supply, and might be used to prevent or control inflation during a period of economic growth.
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