Expansionary Policy

Expansionary Policy

The aim of expansionary or loose monetary policy is to increase investment and consumption by cutting interest rates or increasing the money supply in order to drive up economic activity and growth. Cutting interest rates drives up asset prices, lowers debt service, cuts incentives to save. It leads inter alia to cheaper exports and higher rates of consumption hence growth. Unorthodox loose monetary policy such as has been utilised since the global financial crisis see central banks engage in programmes of quantitative easing – creating money and using it in asset-purchase schemes for government and private-sector debt and equities. Expansionary fiscal policies, which are invariably used in parallel with expansionary monetary policies, see government cut taxes (VAT or income tax) and increase spending (in areas such as infrastructure).

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