Contractionary VS Expansionary Monetary Policy

• Expansionary monetary policy and contractionary monetary policy are two contrasting approaches that central banks use to manage a country's money supply, interest rates, and overall economic conditions
• • Objective of Expansionary Monetary Policy: The primary goal of a expansionary monetary policy is to stimulate economic growth, increase employment, and combat economic downturns, such as recessions or periods of low economic activity.
• • Tools and Actions for Expansionary monetary policy: Central banks implement Expansionary monetary policy by reducing interest rates, purchasing government securities (quantitative easing), and expanding the money supply. Lower interest rates make borrowing cheaper and encourage spending and investment.
• • Impact on Economic Activity of Expansionary Monetary policy: Expansionary monetary policy tends to lead to increased consumer and business spending, higher investment, and a boost in economic activity. It can help counteract deflationary pressures and stimulate job creation.
• • Risk of Expansionary policy: The risk associated with a Expansionary monetary policy is the potential for inflation to rise beyond the central bank's target, which could erode the purchasing power of the currency.
• • Objective or contractionary monetary policy: The primary goal of a contractionary monetary policy is to control inflation and stabilize the economy by slowing down excessive economic growth and preventing the economy from overheating.
• Tools and Actions of contractionary policy: Central banks implement a contractionary monetary policy by raising interest rates, selling government securities, and reducing the money supply. Higher interest rates increase the cost of borrowing and discourage spending and investment
• • Effect on Interest Rates with contractionary policy: In a contractionary monetary policy environment, central banks raise interest rates to reduce borrowing and spending. This can include increasing the federal funds rate and other key interest rates.
• • Impact on Economic Activity with contractionary policy: Contractionary monetary policy tends to slow economic growth, reduce borrowing, and curtail inflation. It can be used to prevent an economy from experiencing excessive price increases and asset bubbles.
• • Risk of contractionary policy: The risk associated with contractionary monetary policy is that it can lead to reduced economic growth and potentially exacerbate unemployment during periods of economic downturns. It may also impact borrowers with higher debt servicing costs.
• Expansionary monetary policy

  Aims to stimulate economic activity and reduce unemployment by lowering interest rates and increasing the money supply
• Contractionary monetary policy


  Aims to control inflation and prevent economic overheating by raising interest rates and reducing the money supply
• Central banks adjust their monetary policies based on prevailing economic conditions, such as inflation rates, economic growth, and employment levels, to achieve their goals and maintain overall economic stability