What Does an Expansionary Monetary Policy Shift?


Quick Answer

An expansionary monetary policy shifts the supply curve for money to the right because of heightened market expectations, according to Boundless. This results in lower interest rates and increased economic growth during periods of slow economic growth.

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Full Answer

The U.S. money supply is controlled by the Federal Reserve Bank. The Fed, as it is known, is a quasi-public financial institution that closely monitors economic activity in the United States and adjusts the money supply to either slow or stimulate the economy. During periods of slow economic growth, the Fed employs expansionary monetary policy in a stimulative effort.

The Fed stimulates the economy by injecting money into the system. This is accomplished by employing three methods, either individually or in combination: lowering the benchmark federal funds rate, lowering the discount rate or purchasing treasury bonds.

The benchmark federal funds rate is the interest rate that banks charge one another for funds held by the Federal Reserve. The discount rate is the rate charged to banks that borrow at the Fed's discount window. Buying treasury bonds simply deposits money into the United States Treasury in exchange for government debt obligations.

The increase in the supply of money theoretically allows banks to lend more money. It also gives the government more money to spend as it sees fit.

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