What is a side effect of a loose money policy?

What is a side effect of a loose money policy?

High inflation increases the price wholesalers and businesses ask for economic resources. While inflation is a natural consequence of economic growth, loose monetary policies can artificially increase inflation. Loose monetary policies result from low discount and prime interest rates.

What are the criticisms of fiscal policy?

Fiscal policy can be swayed by politics and placating voters, which can lead to poor decisions that are not informed by data or economic theory. If monetary policy is not coordinated with a fiscal policy enacted by governments, it can undermine efforts as well.

What is loose money policy?

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.

What happens if the money supply grows too rapidly?

If the supply of money grows too quickly, it can cause inflation, which is a general rise in all prices. If the supply of money grows too slowly, it can cause recession, which is a decline of goods and ser- vices produced. The Fed uses tools to help influence the growth of the money supply.

What is a criticism of fiscal policy made by monetarists?

To borrow more money the interest rate on bonds may have to rise, causing slower growth in the rest of the economy. Monetarist critique. Monetarists argue that in the LRAS is inelastic therefore an increase in AD will only cause inflation to increase.

Why is monetary policy effective?

The goals of monetary policy are to promote maximum employment, stable prices and moderate long-term interest rates. By implementing effective monetary policy, the Fed can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment.

When does the Fed need to loosen monetary policy?

The Fed should loosen monetary policy when a recession has caused unemployment to increase and tighten it when inflation threatens. Of course, countercyclical policy does pose a danger of overreaction. If loose monetary policy seeking to end a recession goes too far, it may push aggregate demand so far to the right that it triggers inflation.

What does loose credit mean in monetary policy?

Monetary policy: Actions of a central bank or other agencies that determine the size and rate of growth of the money supply, which will affect interest rates. Loose credit is the practice of making credit easy to come by, either through relaxed lending criteria or by lowering interest rates for borrowing.

When does a central bank tighten monetary policy?

When a country’s economy is growing at such a fast pace that inflation increases to worrisome levels, the central bank will enact restrictive monetary policy to tighten the money supply, effectively reducing the amount of money in circulation and lowering the rate at which new money enters the system.

How does an accommodative monetary policy affect the economy?

Accommodative money policy is triggered to encourage more spending from consumers and businesses by making money less expensive to borrow through the lowering of short-term interest rates. When money is easily accessible through banks, the money supply in the economy increases.