Question

Classify each action as expansionary or contractionary monetary policy.

Answer 1

Basically, contractionary monetary policies and expansionary monetary policies involve changing the level of the money supplies in a country. Expansionary monetary policy is simply a policy that expands (increases) the supplies of money, whereas contractionary monetary policy contracts (decreases) which are the supplies of a country's currency.

 In the United States, when the Federal Open Market Committee wishes which are increasing the money supply, it can do a combination of three things: Purchase securities on the open market which is known as Open Market Operations, Lower the Federal Discount rate, Lower Reserve Requirements. The contractionary monetary policy is causing a decrease in bond prices and an increasing interest rate. The higher interest rates make domestic bonds which is more attractive, so the demand for domestic bonds rise and the demand for foreign bonds falls.