Expansionary Policies – Monetary Policy

The implementation of expansionary monetary policies is when the government seeks to lower interest rates in order to increase money spending within the economy, usually in times of a slowdown or a recession, to increase economic growth and expand economic activity. 

There are three contractionary monetary policy tools that a government usually implements. 

The first is to reduce interest rates, which is usually the primary monetary policy tool of a central bank such as the RBA. This is done to increase the money supply, as the RBA can decrease the short-term interest rate, so commercial banks can take out short-term loans to meet liquidity needs. This ultimately reduces the cost of borrowing, and will in turn increase investment and spending. This extends to consumers too. 

The second policy tool that can be implemented is the reduction of reverse requirements. As commercial banks are required to hold a certain minimum amount of reserves with the RBA, the RBA can reduce the required amount in reserve in order to increase the amount of money that commercial banks can supply in the economy.

Lastly, a central bank such as the RBA can buy back securities, i.e. reduce the open market operations. Here, they would purchase government-issued securities. Investors would then sell these government securities to the central bank, increasing the money supply in the economy.