In macroeconomics, the primary purpose of expansionary monetary policy is to increase which of the following?

• A. The money supply and the level of aggregate demand
• B. Taxes to lower disposable income and reduce consumption
• C. The policy interest rate set by the central bank
• D. Reserve requirements in order to reduce bank lending

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the goal of expansionary monetary policy. It is designed to stimulate economic activity, especially during periods of low growth or recession.
2. Step 2: Recognize that expansionary monetary policy typically involves actions by the central bank to increase the money supply. This can be done by lowering interest rates or purchasing government securities.
3. Step 3: Know that increasing the money supply tends to lower borrowing costs, encouraging businesses and consumers to spend and invest more.
4. Step 4: Realize that increased spending and investment raise the overall demand for goods and services in the economy, which is referred to as aggregate demand.
5. Step 5: Conclude that the primary purpose of expansionary monetary policy is to increase both the money supply and the level of aggregate demand, rather than focusing on taxes, reserve requirements, or just the policy interest rate alone.