Expansionary Policy

Loading the player...

What is an 'Expansionary Policy'

An expansionary policy is a macroeconomic policy that seeks to expand the money supply to encourage economic growth or combat inflation (price increases). One form of expansionary policy is fiscal policy, which comes in the form of tax cuts, rebates and increased government spending. Expansionary policies can also come from central banks, which focus on increasing the money supply in the economy.

BREAKING DOWN 'Expansionary Policy'

The U.S. Federal Reserve employs expansionary policies whenever it lowers the benchmark fed funds rate or discount rate or when it buys Treasury bonds on the open market, thereby injecting capital directly into the economy.

Expansionary Policy is a useful tool for managing low-growth periods in the business cycle, but it also comes with risks. First and foremost, economists must know when to expand the money supply to avoid causing side effects like high inflation. There is also a time lag between when a policy move is made (whether expansionary or contractionary) and when it works its way through the economy. This makes up-to-the-minute analysis nearly impossible, even for the most seasoned economists. And finally, prudent central bankers and legislators must know when to halt money supply growth or even reverse course and switch to a contractionary policy.

RELATED TERMS
  1. Monetary Policy

    Monetary policy is the actions of a central bank, currency board ...
  2. Contractionary Policy

    A type of policy that is used as a macroeconomic tool by the ...
  3. Policy Mix

    A government's combined use of fiscal policy and monetary policy ...
  4. Fiscal Policy

    Government spending policies that influence macroeconomic conditions. ...
  5. Open Market Operations - OMO

    The buying and selling of government securities in the open market ...
  6. Accommodative Monetary Policy

    When a central bank (such as the Federal Reserve) attempts to ...
Related Articles
  1. Markets

    What's Expansionary Policy?

    Expansionary policy is a macroeconomics concept that focuses on expanding the economy to counteract cyclical downturns. Expansionary policy can be implemented in one of two ways, or a combination ...
  2. Markets

    What Is Contractionary Policy?

    A contractionary policy is a macroeconomic tool used to slow down an economy.
  3. Markets

    Fiscal Vs. Monetary Policy Pros & Cons

    When it comes to influencing macroeconomic outcomes, governments have typically relied on one of two primary courses of action: monetary policy and fiscal policy.
  4. Markets

    A Look At Fiscal And Monetary Policy

    There's a debate over which policy is better for the economy. Find out which side of the fence you're on.
  5. Markets

    A Look At Fiscal And Monetary Policy

    Fiscal and monetary policies provide our government and the Federal Reserve with two powerful tools to regulate the economy.
  6. Markets

    The Top 6 Ways Governments Fight Deflation

    Here are six monetary and fiscal policy tools that governments use to fight deflation.
  7. Markets

    How Unconventional Monetary Policy Works

    Unconventional monetary policy, such as quantitative easing, can be used to jump-start economic growth and spur demand.
  8. Markets

    What Is Fiscal Policy?

    Learn how governments adjust taxes and spending to moderate the economy.
  9. Personal Finance

    Why Is Deflation Bad For The Economy?

    While some inflation is good for economic growth, when prices begin to fall after an economic downturn, deflation may set in causing an even deeper crisis.
  10. Markets

    How Do Central Banks Inject Money Into The Economy?

    Central banks inject money into the banking system, and remove money from it, through monetary policy actions.
RELATED FAQS
  1. Which is more effective: expansionary fiscal policy or expansionary monetary policy?

    Determine the best form of expansionary economic policy: fiscal or monetary. Both have their pros and cons and are appropriate ... Read Answer >>
  2. How does fiscal policy impact the budget deficit?

    Find out how the different uses of fiscal policy impact a government's budget deficit, and the difference between contractionary ... Read Answer >>
  3. How does expansionary economic policy impact the stock market?

    Find out how expansionary economic policy affects the stock market; it is bullish for stocks whether it is monetary or fiscal ... Read Answer >>
  4. What strategies can be used to achieve the goals of contractionary policy?

    Read about the difference between contractionary monetary policy and contractionary fiscal policy, the goals of each, and ... Read Answer >>
  5. What are some different kinds of expansionary policy?

    Learn the most popular types of expansionary policy used by the federal government and the Federal Reserve to increase the ... Read Answer >>
  6. What are some examples of expansionary fiscal policy?

    Learn about expansionary fiscal policy – tax cuts and government spending – that are used by governments to boost spending ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center