Which statement best describes expansionary monetary policy?

• A. The government increases taxes and cuts government spending to reduce budget deficits and slow aggregate demand.
• B. Firms increase production and investment in response to higher productivity, causing long-run aggregate supply to shift right.
• C. A central bank decreases the money supply and/or raises short-term interest rates to reduce inflation by slowing aggregate demand.
• D. A central bank increases the money supply and/or lowers short-term interest rates to stimulate aggregate demand and reduce unemployment (often used during recessions).

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the goal of expansionary monetary policy, which is to stimulate economic activity, especially during periods of recession or high unemployment.
2. Step 2: Recognize that expansionary monetary policy is implemented by the central bank, not the government, so changes in taxes or government spending are not part of this policy.
3. Step 3: Identify the tools used by the central bank, which include increasing the money supply and lowering short-term interest rates to make borrowing cheaper and encourage spending and investment.
4. Step 4: Connect how increasing the money supply and lowering interest rates lead to higher aggregate demand, as consumers and firms are more likely to spend and invest.
5. Step 5: Conclude that the best description of expansionary monetary policy is the central bank increasing the money supply and/or lowering short-term interest rates to stimulate aggregate demand and reduce unemployment.