Conversely, loose or expansionary monetary policy that leads to lower interest rates and a higher quantity of loanable funds will tend to increase business investment and consumer borrowing for big-ticket items.
Monetary Policy and Bank Regulation Monetary Policy and Economic Outcomes Learning Objectives By the end of this section, you will be able to: Contrast expansionary monetary policy and contractionary monetary policy Explain how monetary policy impacts interest rates and aggregate demand Evaluate Federal Reserve decisions over the last forty years Explain the significance of quantitative easing QE A monetary policy that lowers interest rates and stimulates borrowing is an expansionary monetary policy or loose monetary policy.
Factors that influence prices include: Changes in disposable income Changes in tastes and preferences Changes in expectations Changes in price of related goods Population size Factors that change the demand include: Decrease in the price of a substitute Increase in the price of a complement Decrease in consumer income if the good is a normal good Increase in consumer income if the good is an inferior good The demand for money shifts out when the nominal level of output increases.
The Fed should loosen monetary policy when a recession has caused unemployment to increase and tighten it when inflation threatens. We find that a the elasticity of money demand is very small when the interest rate is small, b the probability that a household holds any amount of interest bearing assets is positively related to the level of financial assets, and c the cost of adopting financial technologies is positively related to age and negatively related to the level of education.
The concern is that the process of quantitative easing may prove more difficult to reverse than it was to enact. Interest rates fluctuate based on certain economic factors. Attanasio, Guiso, and Jappelli. The Demand for Money In economics, the demand for money is generally equated with cash or bank demand deposits.
Key Concepts and Summary An expansionary or loose monetary policy raises the quantity of money and credit above what it otherwise would have been and reduces interest rates, boosting aggregate demand, and thus countering recession.