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An easy money policy is a monetary policy that increases the money supply usually by lowering interest rates. [1] It occurs when a country's central bank decides to allow new cash flows into the banking system. Since interest rates are lower, it is easier for banks and lenders to loan money, thus likely leading to increased economic growth. [2]
Consequently, the importance of the money supply as a guide for the conduct of monetary policy has diminished over time, [65] and after the 1980s central banks have shifted away from policies that focus on money supply targeting. Today, it is widely considered a weak policy, because it is not stably related to the growth of real output.
That is, the rule produces a relatively high real interest rate (a "tight" monetary policy) when inflation is above its target or when output is above its full-employment level, in order to reduce inflationary pressure. It recommends a relatively low real interest rate ("easy" monetary policy) in the opposite situation, to stimulate output.
Monetary policy affects the rates you pay on the money you borrow. Many banks base their prime rate, which they use as a base rate for a variety of loans and credit cards, on the federal funds rate.
Monetary policy also generally affects the money supply. At times, changes in money supply measures have been closely related to important economic variables like GDP growth and inflation, and the Federal Reserve has earlier used these measures as an important guide in the conduct of monetary policy.
Easy credit conditions (sometimes referred to as "easy money" or "loose credit") are characterized by low interest rates for borrowers and relaxed lending practices by bankers, making it easy to get inexpensive loans. A credit crunch is the opposite, in which interest rates rise and lending practices tighten.
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