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What Is Expansive Monetary Policy?
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The Fed can also buy or sell securities using money it essentially creates from
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What Is Expansive Monetary Policy?
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Hi, I'm Neville Miller with About.com, and we're going to explain an economic tool called expansionary monetary policy.Put simply, expansionary monetary policy is just what it sounds like: a policy to expand the money supply in an economy.Policy makers would want to do this to fight recession. Ideally, injecting more money into the economy would lower interest rates, and lower interest rates would increase investment and stimulate demand. When interest rates are low, companies are more likely to take out loans to expand their business. They may build a new factory or open a new storefront.
By spending the money they borrow and hiring new workers, they stimulate the economy and lower unemployment. But expansionary policy is only one side of the coin. Too much growth can lead to inflation, in which case policy makers would want to do the opposite — contract the money supply and slow growth.In the United States, the Federal Reserve System is responsible for these decisions. The Fed has several tools to change the money supply, like adjusting the rate banks pay when they borrow money, or changing the rate of reserves they have to keep in their vaults. The Fed can also buy or sell securities using money it essentially creates from thin air. This is perhaps the most direct tool the Fed can use to control the money supply.
Thanks for watching our video about expansionary monetary policy. If you want to learn more, please check out About.com.
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