Question

Short run effects an expansionary monetary policy on the level of income and general price level
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Answer 1

Explanation:

An expansionary monetary policy can bring some fundamental changes to the economy. The following effects are the most common:

1. Stimulation of economic growth

An expansionary monetary policy reduces the cost of borrowing. Therefore, consumers tend to spend more while businesses are encouraged to make larger capital investments.

2. Increased inflation

The injection of additional money to the economy increases inflation levels. It can be both advantageous and disadvantageous to the economy. The excessive increase in the money supply may result in unsustainable inflation levels. On the other hand, the inflation increase may prevent possible deflation, which can be more damaging than reasonable inflation.

3. Currency devaluation

The higher money supply reduces the value of the local currency. The devaluation is beneficial to the economy’s export ability because exports become cheaper and more attractive to foreign countries.

4. Decreased unemployment

The stimulation of capital investments creates additional jobs in the economy. Therefore, an expansionary monetary policy generally reduces unemployment