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. A contractionary monetary policy, also called a tight monetary policy, reduces the quantity of money and credit below what it otherwise would have been and raises interest rates, seeking to hold down inflation. During the 2008–2009 recession, central banks around the world also used quantitative easing to expand the supply of credit.
Glossary
contractionary monetary policy
a monetary policy that reduces the supply of money and loans
countercyclical
moving in the opposite direction of the business cycle of economic downturns and upswings
expansionary monetary policy
a monetary policy that increases the supply of money and the quantity of loans
federal funds rate
the interest rate at which one bank lends funds to another bank overnight
loose monetary policy
see expansionary monetary policy
quantitative easing (QE)
the purchase of long term government and private mortgage-backed securities by central banks to make credit available in hopes of stimulating aggregate demand
tight monetary policy
see contractionary monetary policy