Answer to Question #178528 in Macroeconomics for Rohit

Question

Explain the short term and long term impact of expansionary monetary policy

Answer 1

Expansionary monetary policy aims at increasing the money supply and lowering interest rates. In the short term, expansionary monetary policy stimulates economic growth by reducing borrowing costs, thereby encouraging business to make more extensive capital investments. The policy also leads to a higher rate of inflation in the short run.

In the long term, expansionary monetary policy leads to local currency devaluation, exports become cheaper and attract foreign countries. There is decreased unemployment in the long run as the stimulation capital creates additional jobs to the economy.