2.1 Expansionary Monetary Policy
An expansionary monetary policy is when Central Bank increases the money supply to stimulate the economy. An example of such policy implementation in Japan whereby the nation is facing deflation (i.e. overall decrease in price level of goods and service) thus, inviting recession and increasing the country’s unemployment rate.
The Bank of Japan (BOJ) adopted, the approach of pursuing monetary easing by, changing the overnight rate to around 0 per cent to 0.1 per cent and injecting 55 trillion yen to purchase Japanese government bonds (BOJ, 2011, pp.1). Reduce the overnight rate will increase the money supply in banking system as it encourage banks to borrow money from Central Bank. Thus, other than a reduction in interest rates on loan and deposit accounts in bank, there will also be a lack of incentives for households to save, which therefore, encourages them to