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    Contractionary and Expansionary Monetary Policy

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    What is the difference between contractionary and expansionary monetary policy? What are the pros and cons of using expansionary and contractionary monetary policy tools under the following scenarios; depression, recession, and robust economic growth? Which do you think is more appropriate today?

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    Expansionary monetary policy is any monetary policy that induces firms, and households to increase their spending. This is usually accomplished through lower interest rates and higher money supply. The idea is this: lower interest rates will increase returns on investment since firms and households do not gain much from holding cash. This will entice them to increase spending, and hence that will raise AD. Rising AD will therefore push the economy out of a recession.

    Contractionary monetary policy does the exact opposite in trying to cut down spending by firms and households. This is usually accomplished through higher interest rates and lower money supply. It is usually adopted ...

    Solution Summary

    Contrast and compare contractionary and expansionary monetary policy.