What Are Two Types of Monetary Policy?

Monetary policy can either be expansionary or contractionary. The former occurs when the central banking system of a country, such as the Federal Reserve in the United States, increases the money supply and lowers interest rates, while the latter occurs when it decreases the money supply and raises interest rates.

The two types of monetary policy are used to combat different economic issues. Expansionary policy is typically used to reduce unemployment during a recession with lower interest rates allowing businesses to more easily borrow money to expand and hire additional workers. The purpose of a contractionary policy is to slow inflation to avoid market distortions and the deterioration of asset values.