Expansionary Monetary Policy

If the economy is heading into a recession, the fastest, however not the most effective, way to deal with it is for the Federal Reserve to use expansionary monetary policy. Expansionary monetary policy is not the most effective way to deal with this issue because it does not directly impact the amount of spending in the economy directly as expansionary fiscal policy does, however, given that the economy is not embroiled in the recession, but is heading into one, this policy is the fastest way to try and prevent a full recession from happening. The most common way in which expansionary monetary policy is implemented involves the buying of treasury securities from commercial banks increasing their excess reverse; in doing so, the money supply, or the amount of money currently in …show more content…
The goal of any of these is to increase the amount of money that banks can lend out to the public. Decreasing the Federal Funds Rate would make it easier for banks to loan to one another in instances where a bank is low on their required reserves. This loaning of funds would then allow banks to loan more money out to consumers and businesses, thereby increasing the money supply. Decreasing the Discount rate would also increase the money supply as it would allow banks to lend from the Federal Reserve at a lower interest rate, thereby increasing the amount of money that they could lend to the public. Additionally, decreasing the Federal Funds Rate would decrease the amount of required reserves that banks must hold in their vaults, allowing for the banks to lend more money out to the public. With an increase in the money supply, consumers will be able to spend more on goods, increasing consumer spending, and businesses will able to invest more money, increasing investment spending. These would then increase the overall GDP of the