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Expansionary Fiscal and Monetary Policies
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How does expansionary monetary policy typically affect interest rates in an economy?

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Choose the Best Answer

A

It raises interest rates to curb inflation

B

It lowers interest rates to stimulate economic activity

C

It has no effect on interest rates

D

It makes interest rates more volatile

Understanding the Answer

Let's break down why this is correct

Answer

Expansionary monetary policy is when a country's central bank decides to increase the money supply to boost the economy. When the central bank does this, it often lowers interest rates, which makes borrowing money cheaper for individuals and businesses. For example, if a bank can borrow money at a lower rate, it can lend that money to customers at a lower rate too, encouraging people to take out loans for things like homes or cars. As more people and businesses borrow and spend, this can lead to more economic activity and growth. Overall, lower interest rates help stimulate the economy by making it easier for everyone to access funds.

Detailed Explanation

Expansionary monetary policy lowers interest rates. Other options are incorrect because Some think that raising interest rates controls inflation; It's a common belief that monetary policy has no effect on rates.

Key Concepts

Expansionary monetary policy
Interest rates
Topic

Expansionary Fiscal and Monetary Policies

Difficulty

medium level question

Cognitive Level

understand

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