Expansionary monetary policy

• Expansionary monetary policy is a policy to increase aggregate demand
• What is expansionary monetary policy?

  Expansionary policy is a policy to increase aggregate demand
• Expansionary monetary policy decreases interest rates and the exchange rate depreciates increasing net exports
• What does expansionary monetary policy do to interest rates?

  decrease in interest rates
• What does expansionary monetary policy do to exchange rates?

  depreciates exchange rate increasing net exports
• However expansionary monetary policy could lead to liquidity trap where interest rates are so low that aggregate demand is not affected
• What is liquidity trap?

  When interest rates are so low that aggregate demand isnt stimulated
• However expansionary monetary policy is dependent on consumer and business confidence
• How does expansionary monetary policy affect the demand for bank loans?

  Increase
• What are some secondary effects of expansionary monetary policy?

  Increased consumption, higher investment, rising asset prices, higher employment, potential inflation.
• How does expansionary policy typically affect the domestic currency?

  Depreciation