How does expansionary monetary policy promote economic growth in the economy?

Question

How does expansionary monetary policy promote economic growth in the economy?

Here is what I know:

Expansionary monetary policy promotes the growth of money supply by purchasing government bonds, lowering the reserve requirement, and lowering the federal funds interest rate.

But how does expansionary monetary policy expand economic growth? I dont get that at all, help please

Answer 1

Think about it. If there is more money in the economy, money is more readily available. Consumers and firms are more willing to borrow money since they do not have to pay as high an interest rate on it as they did before, and thus economic activity increases.

Answer 2

Great! You know that expansionary monetary policy lowers the interest rate - that's the first stage.

A lower interest rate will encourage firms to invest more (when interest rates are higher investment is less because the opportunity cost of investing is higher - i.e. you loose more interest). Higher investment directly boosts AD and can affect productivity growth in the long run.

In addition, lower interest rates mean households can acquire loans more easily, which should boost consumption. It also limits the returns to saving, which may reduce savings rates and increase consumption further.

Answer 3

It doesn't - it's a ploy by the moneylenders.

Read up on Austrian economics.