John Maynard Keynes.
Monetary policy is a term used to refer to the control of the money supply by a government or any institution that has authority over money in a given economic system. In an expansionary monetary policy, those who have control over money try to increase the money supply. Changing the money supply can change interest rates, price levels, and other important economic factors. Different schools of economic thought disagree on how expansionary monetary policy affects economic issues such as unemployment, incomes, and output. There are a number of different economic tools to change the money supply, including regulating banks’ money reserves, changing interest rates, and increasing or decreasing money lending.
In the United States, the Federal Reserve can enact an expansionary monetary policy.
There are several different views on the effects that expansionary monetary policy has on the economy. The classical view of monetary policy, which is based on a quantity theory of money, asserts that there is a strong and direct correlation between the money supply and price levels. Keynesian economics, however, supports the idea that there is only an indirect link between the two and that it may not be particularly useful. As such, Keynesian economists are more likely to use fiscal policy than monetary policy to bring about economic change.
Much of monetary policy is aimed at manipulating the money supply relative to the demand for money. An expansionary monetary policy, therefore, often involves increasing the money supply until it exceeds the demand. Assuming there are no unexpected variables in the economy, this usually leads to a general reduction in interest rates.
Banks are required to keep a certain amount of money in reserve, which means that they cannot lend that money. This policy is intended to ensure that banks always have enough money in reserve to handle withdrawals. It also provides a tool to manipulate the money supply. In an expansionary monetary policy, the monetary authority can lower this reserve requirement, allowing banks to lend more money. This expansionary monetary policy introduces more money into the economy, thereby increasing the money supply.
The tools available for expansionary monetary policy vary depending on the nature of a given economic system. Different central banks, finance ministries, or government departments have different levels of control over monetary policy. In the United States, for example, the Federal Reserve has substantial power to enact expansionary monetary policy. It does this by fixing some interest rates and lending money to other banks in the United States.