Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It decreases inflation by reducing money supply.
B
It has no effect on inflation.
C
It increases inflation by increasing money supply.
D
It stabilizes inflation at a constant rate.
Understanding the Answer
Let's break down why this is correct
Answer
Expansionary monetary policy is when a country's central bank increases the money supply to encourage economic growth. When more money is available, people and businesses can borrow and spend more, which leads to increased demand for goods and services. As demand rises, prices may also go up, causing inflation to increase. For example, if a central bank lowers interest rates, a business might take a loan to expand, hire more workers, and produce more goods, leading to higher spending and potentially higher prices. Therefore, while expansionary policy can boost economic activity, it often results in higher inflation rates if demand outpaces supply.
Detailed Explanation
Expansionary monetary policy means the government increases the money supply. Other options are incorrect because Some might think that reducing the money supply lowers inflation; It's a common belief that adding money has no effect.
Key Concepts
expansionary monetary policy
inflation
Topic
Expansionary Policy and Investment
Difficulty
medium level question
Cognitive Level
understand
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