What is the primary objective of expansionary monetary policy?

Expansionary monetary policy aims to stimulate economic growth by increasing the money supply and lowering interest rates. When the central bank, such as the Federal Reserve in the United States, implements this policy, it does so with the intention of making borrowing cheaper and encouraging spending by consumers and businesses.

By increasing the money supply, the policy injects liquidity into the economy. This added liquidity leads to more available funds for banks to lend, which in turn lowers the cost of loans, reflected in decreased interest rates. Lower interest rates typically lead to increased consumer spending on durable goods and higher levels of business investment, ultimately spurring economic activity.

This approach is especially effective during periods of economic downturn or recession when demand is low. By fostering an environment conducive to investment and consumption, expansionary monetary policy aims to boost overall economic output and reduce unemployment. Therefore, the primary objective of this type of policy aligns specifically with the goal of increasing the money supply and lowering interest rates.