Chapter 15, Problem 11AA

To determine

To evaluate: The two types of monetary policies.

Explanation of Solution

The two types of monetary policies are:

1. Expansionary monetary policy: When, during a recession or slowdown, a nation faces a huge unemployment rate, the monetary authority may opt for an expansionary policy aimed at growing economic growth and expanding economic activity. The monetary authority, as part of the expansionary monetary policy, often lowers interest rates through numerous initiatives that make saving money relatively unfavorable and promote spending. It leads to a greater supply of money on the market, with the hope of boosting investment and consumer spending.
2. Contractionary monetary policy: The increased supply of money can lead to higher inflation, higher living costs and higher business costs. Contractionary monetary policy seeks to bring down inflation by rising interest rates and reducing the growth of money supply. It can delay economic growth and raise unemployment but also allows inflation to be tamed.

Economics Concept Introduction

Introduction: The demand side of economic policy, refers to actions taken by the central bank of a country to regulate money supply in order to accomplish macroeconomic goals which encourage sustainable economic growth is called Monetary Policy.