what is an expansionary policy 
expansionary policy is a form of macroeconomic policy that seeks to encourage economic growth by increasing aggregate demand it can consist of either monetary policy or fiscal policy or a combination of the two it is part of the general policy prescription of keynesian economics to be used during economic slowdowns and recessions in order to moderate the downside of economic cycles expansionary policy is also known as loose policy investopedia jiaqi zhouunderstanding expansionary policythe basic objective of expansionary policy is to boost aggregate demand to make up for shortfalls in private demand it is based on the ideas of keynesian economics particularly the idea that the main cause of recessions is a deficiency in aggregate demand expansionary policy is intended to boost business investment and consumer spending by injecting money into the economy either through direct government deficit spending or increased lending to businesses and consumers from a fiscal policy perspective the government enacts expansionary policies through budgeting tools that provide people with more money increasing spending and cutting taxes to produce budget deficits means that the government is putting more money into the economy than it is taking out expansionary fiscal policy includes tax cuts transfer payments rebates and increased government spending on projects such as infrastructure improvements for example it can increase discretionary government spending infusing the economy with more money through government contracts additionally it can cut taxes and leave a greater amount of money in the hands of the people who then go on to spend and invest types of expansionary policyexpansionary fiscal policy are policies enacted by a government that often increases or decreases the money supply to make changes to the economy in other words governments can directly give money to individuals businesses or taxpayers alternatively to slow the economy it can take it away during expansionary periods governments can increase spending on infrastructure projects social programs and other initiatives to boost demand and stimulate economic growth they may also enact tax cuts to reduce taxes which puts more money in consumers pockets and stimulates spending governments can also increase transfer payments such as welfare unemployment or other benefits to increase household income expansionary monetary policy works by expanding the money supply faster than usual or lowering short term interest rates it is enacted by central banks and comes about through open market operations reserve requirements and setting interest rates the u s federal reserve employs expansionary policies whenever it lowers the benchmark federal funds rate or discount rate decreases required reserves for banks or buys treasury bonds on the open market quantitative easing or qe is another form of expansionary monetary policy for example when the benchmark federal funds rate is lowered the cost of borrowing from the central bank decreases giving banks greater access to cash that can be lent in the market when reserve requirements decline it allows banks to lend a higher proportion of their capital to consumers and businesses when the central bank purchases debt instruments it injects capital directly into the economy on august 27 2020 the federal reserve announced that it would no longer raise interest rates due to unemployment falling below a certain level if inflation remained low it also changed its inflation target to an average meaning that it will allow inflation to rise somewhat above its 2 target to make up for periods when it was below 2 the federal reserve kept interest rates at 0 until march 2022 it then decided to pivot and begin combatting inflation by raising the rate as of april 2024 the effective fed funds rate is at 5 33 1