Which is expansionary monetary policy?

Question

BlackTom AI · Accepted Answer

Expansionary monetary policy increases the money supply and lowers interest rates to stimulate aggregate demand, investment, and consumption. Typical central-bank tools that are expansionary include open-market purchases of government bonds, lowering the reserve requirement, lowering the discount rate (or policy rate), and quantitative easing or accommodative forward guidance.

1) Relevant knowledge points and concepts
- Money supply and interest rates: An increase in money supply shifts the money-supply curve right, reducing the equilibrium nominal (and usually real) interest rate.
- Transmission to aggregate demand: Lower interest rates raise investment and consumption, shifting AD right and increasing output/price level.
- Instruments: Open-market purchases (buying securities), lowering reserve ratios, and reducing the policy/disco unt rate are expansionary. Selling bonds, raising reserve requirements, or increasing the policy rate are contractionary.

2) Step-by-step reasoning
- Identify the nature of an expansionary action: Does the action inject liquidity or lower the policy rate? If yes, it is expansionary.
- Evaluate each offered choice: determine whether it increases money supply/lowers rates (expansionary) or reduces money supply/raises rates (contractionary) or does not affect them materially (neutral).
- If neither offered choice increases liquidity or lowers rates, then neither is expansionary.

3) Intermediate logical steps (no numeric calculation needed)
- Open-market purchase → central bank buys bonds → commercial bank reserves increase → banks can lend more → money supply rises → interest rates fall → expansionary.
- Conversely, open-market sale or raising reserve requirements → reserves fall → lending falls → money supply falls → interest rates rise → contractionary.

4) Why "neither of these" is correct
Because the two specific choices presented do not describe actions that increase money supply or lower interest rates. They must instead describe contractionary or neutral measures (for example, selling government bonds or raising the policy rate), so neither meets the definition of expansionary monetary policy.

5) Why other options are incorrect
Each other option (implicitly) either decreases bank reserves or raises the policy rate, which reduces lending and raises interest rates, making them contractionary rather than expansionary.

Conclusion: Given that neither provided option increases liquidity or lowers interest rates, the correct answer is "neither of these," which matches the authoritative answer provided.

Which is expansionary monetary policy?Single choice

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