What is expansionary monetary policy and how does it work?

Expansionary monetary policy is designed to increase economic growth through stimulation of aggregate demand.There are 2 different approaches/sides to modern day expansionary MP:1) Lowering Interest RatesBank of England's MPC can lower bank rate, this lowers the cost of borrowing money for commercial banks.Commercial banks then pass on these lowered costs in the form of reduced interest rates for consumers.This encourages consumers to borrow money and spend on credit while discouraging them from saving.2) Quantitative EasingQE involves a central bank (i.e. BofE) buying bonds from commercial banks.Commercial banks then have increased financial capital to lend to customers (at lower rates).This causes increased consumption and a rise in AD.This can be illustrated using a simple AD/SRAS Diagram with AD shifting right.(In a real session, I would draw this on the whiteboard)

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Answered by Alisdair F. Economics tutor

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