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)

AF
Answered by Alisdair F. Economics tutor

2952 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

Evaluate measures that could be pursued by individual firms and by the government to reduce a current account deficit (30)


Evaluate the view that reducing unemployment inevitably has trade-offs with other macroeconomic objectives.


Evaluate whether a tax on petrol in the UK would reduce the demand for cars.


Why is the marginal cost curve shaped the way it is?


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

MyTutor is part of the IXL family of brands:

© 2025 by IXL Learning