What does an expansionary monetary policy usually involve?

An expansionary monetary policy typically involves lowering interest rates. This approach aims to stimulate economic activity by making borrowing cheaper for consumers and businesses. When interest rates are reduced, it encourages spending and investment, as loans for big purchases, such as homes and equipment, become more affordable. Lower interest rates can also lead to increased consumer confidence, as individuals feel more capable of financing purchases on credit.

In an expansionary monetary policy context, central banks, such as the Federal Reserve in the United States, might also engage in other practices like purchasing government securities to increase the money supply, further promoting lending and spending.

While options like increasing interest rates, reducing government spending, and raising taxes are often associated with contractionary measures intended to cool down an overheating economy or control inflation, they are not characteristics of expansionary monetary policy. Instead, they could lead to reduced economic growth, which is contrary to the goals of expansionary monetary policies.