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  • Expansionary monetary policy is when a central bank uses its tools tostimulate the economy. That increases the money supply, lowers interest rates, and increases aggregate demand. It boosts growth asmeasured by gross domestic product. It lowers the valueof the currency, thereby decreasing the exchange rate.
  •  Expansionary monetary policy causes an increase in bond prices and a reduction in interest rate. Lower interest rate lead to higher levels of capital investment. The lower interest make domestic bonds less attractive so the demand for domestic fall and the demand for foreign bonds rises then causing the decrease in the exchange rate. A lower exchange rate causes exports to increase and import decrease and the balance of trade to increase.
  • Contractionary monetary policy is a form of economic policy used to fight inflation which involves decreasing the money supply in order to increase the cost of borrowing which in turn decreases GDP and dampens inflation.
  • This is the second types of monetary policy
  • Contractionary monetary policy is a form of economic policy used tofight inflation which involves decreasing the money supply in order to increasethe cost of borrowing which in turn decreases GDP and dampens inflation.
  •  Contractionary monetary policy causes a decrease in bond prices and an increase in interest rate. The higher interest rate lead to lower levels of capital investment and make domestic bond more attractive so the demand for domestic bonds rises and the demand for foreign bonds falls then causing an increase in the exchange rate. A higher exchange rate causes exports to decrease and imports to increase and balance of trade to decrease.
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