how expansionary policy is implemented
expansionary monetary policy is implemented by central banks to stimulate economic growth and combat economic slowdown for the united states the federal reserve is overseen by a collection of individuals this board of governors that oversees the federal reserve system proposes reviews and votes on proposed regulation these economic experts monitor macroeconomic conditions implement changes and review implications of those changes in other cases measures are voted on my members of the government such as the house of representative or senate these bills may include changes to tax policies for example this type of policy must be approved by all appropriate levels of government before implemented once measures have passed by the federal reserve the policies are communicated and implemented by the appropriate entities for example the irs is then tasked with integrated tax breaks into internal revenue codification in another example monetary rates are communicated through branches of lending starting with the federal reserve branches and extending to other institutions the risks of expansionary monetary policyexpansionary policy is a popular tool for managing low growth periods in the business cycle but it also comes with risks these risks include macroeconomic microeconomic and political economy issues gauging when to engage in expansionary policy how much to do and when to stop requires sophisticated analysis and involves substantial uncertainties expanding too much can cause side effects such as high inflation or an overheated economy there is a time lag between when a policy move is made and when it works its way through the economy this makes up to the minute analysis nearly impossible even for the most seasoned economists prudent central bankers and legislators must know when to halt money supply growth or even reverse course and switch to a contractionary policy which would involve taking the opposite steps of expansionary policy such as raising interest rates even under ideal conditions expansionary fiscal and monetary policy risk creating microeconomic distortions through the economy simple economic models often portray the effects of expansionary policy as neutral to the structure of the economy as if the money injected into the economy were distributed uniformly and instantaneously across the economy in actual practice monetary and fiscal policy both operate by distributing new money to specific individuals businesses and industries who then spend and circulate the new money to the rest of the economy rather than uniformly boosting aggregate demand this means that expansionary policy always involves an effective transfer of purchasing power and wealth from the earlier recipients to the later recipients of the new money in addition like any government policy an expansionary policy is potentially vulnerable to information and incentive problems the distribution of the money injected by expansionary policy into the economy can obviously involve political considerations problems such as rent seeking and principal agent problems easily crop up whenever large sums of public money are up for grabs and by definition expansionary policy whether fiscal or monetary involves the distribution of large sums of public money there is no clear signal whether a government should expand or contract an economy all it can do is evaluate all available data and decide what may be the best course of action for this reason expansionary policy is often controversial as it is driven by opinion effects of expansionary policy