Q:

What are two types of monetary policy?

A:

Quick Answer

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.

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Full Answer

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.

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Related Questions

  • Q:

    What are some examples of expansionary fiscal policy?

    A:

    Some examples of expansionary fiscal policy include lowering taxes and increasing government spending. An expansionary fiscal policy is implemented by a government when they want to raise the overall amount of money available to citizens.

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  • Q:

    What is the basic objective of monetary policy?

    A:

    According to European Central Bank, the basic objective of monetary policy is to improve price stability and achieve a high level of employment in the economy. Monetary policy also serves as a tool to stimulate economic growth during recessions and reduce price inflation.

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    What are the major strengths of monetary policy?

    A:

    The greatest strengths of monetary policy are increased accountability and transparency on the part of the Federal Reserve. Because the Reserve is in no way democratically elected or appointed, this gives taxpayers more involvement in and control over its decision-making.

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  • Q:

    What is a monetary instrument?

    A:

    A monetary instrument is a form of domestic or foreign currency that includes, but is not limited to, checks, certain investments, traveler’s checks and money orders, according to the State of Connecticut Judicial Branch. This is the legal definition that government bodies use.

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