Key Concepts and Summary

Key Concepts and Summary

An expansionary (or loose) monetary policy raises the quantity of money and credit above what it otherwise would have been and reduces interest rates, boosting aggregate demand, and thus countering recession. A contractionary monetary policy, also called a tight monetary policy, reduces the quantity of money and credit below what it otherwise would have been and raises interest rates, seeking to hold down inflation. During the 2008–2009 recession, central banks around the world also used quantitative easing to expand the supply of credit.

Glossary

contractionary monetary policy

a monetary policy that reduces the supply of money and loans

countercyclical

moving in the opposite direction of the business cycle of economic downturns and upswings

expansionary monetary policy

a monetary policy that increases the supply of money and the quantity of loans

federal funds rate

the interest rate at which one bank lends funds to another bank overnight

loose monetary policy

see expansionary monetary policy

quantitative easing (QE)

the purchase of long term government and private mortgage-backed securities by central banks to make credit available in hopes of stimulating aggregate demand

tight monetary policy

see contractionary monetary policy