expansionary vs contractionary monetary policy

Expansionary Monetary Policy

Aims to stimulate economic growth during periods of slow growth or recession.

Contractionary Monetary Policy

Aims to reduce inflation or cool down an overheated economy.

Actions Taken by Central Bank (Expansionary)

Lower interest rates, increase the money supply, lower reserve requirements.

Actions Taken by Central Bank (Contractionary)

Raise interest rates, decrease the money supply, increase reserve requirements.

Effects of Expansionary Policy

Encourages borrowing and spending, boosts consumption and investment, leads to economic growth.

Effects of Contractionary Policy

Discourages borrowing and spending, reduces consumption and investment, helps control inflation.

Risks of Expansionary Policy

Can lead to high inflation and currency depreciation.

Risks of Contractionary Policy

Can lead to economic slowdown or recession and increased unemployment.

Lower interest rates

A tool used in expansionary monetary policy to make borrowing cheaper.

Increase reserve requirements

A tool used in contractionary monetary policy to limit the amount banks can lend.