9. The central bank (the Reserve Bank of Australia) decided to implement an expansionary policy action. What would you expect to happen to the nominal interest rate, the real interest rate and the money supply? Under what economic circumstances IS this type of policy action be appropriate? What dangers might ensue from it (2 marks)
In economics, expansionary policies are fiscal policies, like higher spending and tax cuts, that encourage economic growth. In turn, an expansionary monetary policy is monetary policy that seeks to increase the size of the money supply. In most nations, monetary policy is controlled by either a central bank or a finance ministry.
Neoclassical and Keynesian economics significantly differ on the effects and effectiveness of monetary policy on influencing the real economy; there is no clear consensus on how monetary policy affects real economic variables (aggregate output or income, employment). Both economic schools accept that monetary policy affects monetary variables (price levels, interest rates).
Monetary policy relies on a number of tools: monetary base, reserve requirements, discount window lending and interest rates. The expansion of the monetary supply can be achieved indirectly by decreasing the nominal interest rates.