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Monetary policy is often referred to as being either expansionary (stimulating economic activity and consequently employment and inflation) or contractionary (dampening economic activity, hence decreasing employment and inflation).
To cure the Inflation, we would use Contractionary monetary policy which would lower it down and bring the economy to an equilibrium point. To curtail Unemployment , we would use Expansionary monetary policy which would do the same as above.
An IMF working paper [4] by Guajardo, Leigh, and Pescatori [5] published in Journal of the European Economic Association on Expansionary Austerity and the Expansionary Fiscal Contraction hypothesis that examined changes in policy designed to reduce deficits found that austerity had contractionary effects on private domestic demand and GDP.
Both fiscal and monetary policy are tools used to keep the U.S. economy healthy. Both can affect your personal economy. But that's where the similarities end. There's actually a big difference ...
[1] [2] Instruments can be divided into two subsets: a) monetary policy instruments and b) fiscal policy instruments. Monetary policy is conducted by the central bank of a country (such as the Federal Reserve in the U.S.) or of a supranational region (such as the Euro zone). Fiscal policy is conducted by the executive and legislative branches ...
Expansionary monetary policy lowers interest rates, increasing economic activity, whereas contractionary monetary policy raises interest rates. In the case of a fixed exchange rate system, interest rate decisions together with direct intervention by central banks on exchange rate dynamics are major tools to control the exchange rate. [42]
Contractionary monetary policy is thought to increase the size of the external finance premium, and subsequently, through the credit channel, reduce credit availability in the economy. The external finance premium exists because of frictions—such as imperfect information or costly contract enforcement—in financial markets.
Expansionary monetary policy will cause the interest rate in a country to fall and deposits that are denominated in that domestic currency become less attractive than their foreign equivalents. As a result, the value of domestic deposits will fall compared to foreign deposits, which leads to a depreciation of the domestic currency. Since the ...