What is expansionary monetary policy?

• A. A government policy of raising taxes and cutting spending to reduce budget deficits and slow economic growth.
• B. A central bank policy that decreases the money supply and raises interest rates to cool down inflation and reduce aggregate demand.
• C. A policy that fixes the exchange rate by intervening in foreign exchange markets to maintain currency stability.
• D. A central bank policy that increases the money supply and lowers interest rates to stimulate economic activity and aggregate demand.

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the role of monetary policy, which is primarily conducted by a country's central bank to influence the economy by managing the money supply and interest rates.
2. Step 2: Recognize that expansionary monetary policy is used to stimulate economic growth, especially during periods of recession or low economic activity.
3. Step 3: Identify the key tools of expansionary monetary policy: increasing the money supply and lowering interest rates.
4. Step 4: Understand the effects of these tools: increasing the money supply makes more funds available for borrowing, and lowering interest rates reduces the cost of borrowing, both of which encourage spending and investment.
5. Step 5: Conclude that expansionary monetary policy aims to increase aggregate demand, thereby stimulating economic activity and potentially reducing unemployment.