Expansionary and Contractionary Monetary Policies

Expansionary Monetary Policy (AO3)

This is for when you want to expand the economy.

• Decrease minimum reserve ratio (so commercial banks can lend out more)

• Decrease the central bank interest rate (so commercial banks can take out cheaper loans, so consumers and firms hopefully also get cheaper loans). This is not that effective for expansionary policy as banks will often simply retain their loans' interest rates to increase profit margins.

• Buy government bonds (so there is more money in the economy)

• Buy corporate bonds (a.k.a quantitative easing, so there is more money in the economy)

Contractionary Monetary Policy (AO3)

This is for when you want to slow the economy down. This is usually done to lower inflation rates, but will also drag down real GDP with it.

• Increase minimum reserve ratio 

• Increase the central bank interest rate

• Sell government bonds