Expansionary monetary policy –YES or NO?

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If the Fed wishes to increase the money supply, it can do a combination of three strategies:

  1. Purchase securities on the open market, known as Open Market Operations
  2. Lower the Ferderal Discount Rate
  3. Lower Reserve Requirements

Above combinations will impact the interest rates. If the Fed decides to buy securities on the open market, it will increase the price of those securities. The Federal Discount Rate is an interest rate, so lowering it will causes the interest rate to lower. If the Fed wants to lower the reserve requirements, the central bank will allow commercial banks to hold proportionately less cash, and banks therefore are able to grant more credit. So no matter what strategy the Fed uses to increase money supply, interest rates will decline and bond prices will rise.

In favour of expansionary monetary policy

If the Fed wishes to increase money supply, will it be desirable for creating jobs and stimulate the economy.

Consumers and businesses can borrow money more easily (because of lower interest rates) leading them to spent more money.

This means consumers and businesses can borrow money more easily, leading them to spend more money.

A lower exchange rate causes exports to increase, imports to decrease and the balance of trade to increase.

Against expansionary monetary policy

In the short- term, expansionary monetary policy might mitigate the problems of low growth and unemployment but, in the long term, it will only lead to high cost production and drive up inflation, which in turn will hurt the poor people. This will be more difficult for the economy to expand since the cost of money out paces the value of the investments that can be made.

To conclude, whether against or in favour of expansionary monetary policy, it depends on what area a country is weak and strong and after that determination it can decide what tipe of monetary policy will be the most beneficial for the country and its economy.

Riskbusters

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