Monetary Policy and The Real Economy
As noted above, the relationship between monetary policy and the real economy is uncertain (expansionary monetary policy should not be confused with economic expansion, which is an increase in economic output in the real economy). Any change to the real economy resulting from an expansionary monetary policy is subject to time lags and effects from other economic variables; in addition, there are possible side effects of expansion, including inflation.Recall the ways that the Fed implements expansionary monetary policy. A lower required reserve ratio provides more funds for banks to lend to their customers. If the Fed decides to buy Treasury securities, the supply of loanable funds and the banks’ reserves increase. Finally, banks find it easier to borrow from the Fed and increase their reserves when the discount rate is lower. Expansionary monetary policy shifts the aggregate demand AD curve outward.
Read more about this topic: Expansionary Monetary Policy
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