Understanding expansionary policy
Expansionary policy is nothing but a policy that is introduced in the economy with an aim to push economic growth or counter deflation. There are various ways to achieve growth:
• Tax cuts
• Increased government spending
All the above three mentioned policies are part of fiscal policy.
It is the central bank with introduces expansionary policies. The prime objective is to increase the supply of money in the system. A central bank comes up with expansionary policies by lowering repo rate or when it purchases treasury bonds in the open market by supplying money in the market.
Although, expansionary policy helps in reviving business cycle, risks follow with the same as well.
Increase in the money supply can lead to inflation so governments should perfectly know where to spend money.
Wise central bankers and legislators should know when to stop the infusion of money in the system in order to prevent inflationary forces from dominating.