Example 1
Expansionary monetary policy is implemented when it is required to increase economic activities and, consequently, the GDP. An example of monetary policy is the “Great Recession of 2007-2009”, when the Federal Reserve reduced the interest rate from 5.25% to 0% in 2008 to increase the money supply in the market (Hussain, 2020). Although the Federal Reserve utilized all the tools of expansionary policy to combat the recession, the economy did not fully recover, which consequently led the bank to use quantitative easing for open market operations.
Example 2
As opposed to expansionary monetary policy, “Contractionary Monetary Policy” is implemented when the central bank wants to reduce the money supply in the market to prevent excessive economic growth, which can lead to unwanted inflation. The period of the late 1970s was a good example of contractionary monetary policy when the federal reserves increased the interest rate to combat the increasing inflation rate, which had already reached 8.7% in 1973 (Hussain, 2020b). Consequently, the inflation rate decreased to 6% at the end of the decade.
Monetary Policy Of Federal Reserve
As shown earlier, during the recession, the Fed implemented an expansionary monetary policy to combat the rapid decline in the economy, which led to a negligible interest rate and quantitate easing. Since improving economic growth is the main objective of the expansionary policy, the Fed is currently implementing an expansionary monetary policy to cope with the unemployment caused by business shutdowns during the pandemic. Moreover, as noted by the Associated Press (2021), the Fed intends to keep the interest rates low till 2023, along with buying government bonds to continuously supply money in the market and promote economic activities. As discussed above, these are the prominent tools of contractionary monetary policy.
References
Associated Press. (2021). Fed Stresses Its Commitment to Low Rates as Economy Stumbles. US News & World Report; U.S. News & World Report. https://www.usnews.com/news/business/articles/2021-01-27/fed-stresses-its-commitment-to-low-rates-for-the-long-run
Hussain, A. (2020a). How the Federal Reserve uses expansionary monetary policy to stimulate growth during an economic downturn. Business Insider. https://www.businessinsider.com/what-is-expansionary-monetary-policy
Hussain, A. (2020b). Why the Federal Reserve uses contractionary monetary policy to curb the inflation that accompanies an overheating economy. Business Insider. https://www.businessinsider.com/what-is-contractionary-monetary-policy
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