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Milan Vaishnav
Milan Vaishnav, Financial Advisor
Category: Finance
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Experience:  Technical Analyst in Financial Markets -- Experience of more than 10 years in consulting
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What are the pros and cons of using contractionary and expansionary

Customer Question

What are the pros and cons of using contractionary and expansionary monetary policy tools during depression, recession and robust economic growth?
Submitted: 6 years ago.
Category: Finance
Expert:  Milan Vaishnav replied 6 years ago.

Dear Friend,

 

Contractionary monetary policy is monetary policy that seeks to reduce the size of the money supply. They are fiscal policies, like lower spending and higher taxes, that reduce economic growth.In most nations, monetary policy is controlled by either a central bank or a finance ministry.

 

Expansionary monetary policy is when the Federal Reserve is using its tools to stimulate the economy. This usually means lowering the Fed Funds rate to increase the money supply. This will cause mortgage rates to decline, consumers to borrow and spend, and businesses to grow, thereby hiring more workers who will consume even more. The opposite is contractionary monetary policy.

 

The using of these policies have both type - good and bad effects in different economic times.

 

If contractionary monetary policy is used, it affects adversely in depression and recession. It both of these situation, when if fact some stimulus and spending demannd needs to be generated, it works adversely and infact contributes to it. It is used only when there is out-of-control infation and money supply needs to be checked andcontrolled.

 

On the other hand, Expansionary monetory policy should be used during depression and recession as it aids in fighting against such economic situation. It increases the money suppoly thereby creating both purchasing power and giving stimulus to production (by increase in credit) and also stimulus to spend to the consumers. If used during inflation, it has adverse affects as it infact aids inflation to increase.

 

Referemces:

http://useconomy.about.com/od/grossdomesticproduct/f/Depression.htm

http://en.wikipedia.org/wiki/Contractionary_monetary_policy

http://useconomy.about.com/od/glossary/g/Expansionary.htm

http://economics.about.com/cs/money/a/policy.htm

 

I hope the above helps...

Regards,