Expansionary vs. Contractionary Monetary Policy: main differences

Monetary policy is one of the most effective strategies applied by central banks in pursuing economic stability. It involves adjustments made on the total monetary supply related to the overall level of interest rates prevailing in a nation. There are two major sub-divisions of monetary policy: “expansionary”, which is designed to expand, and “contractionary”, which has more opposing objectives. Let us focus on contractionary and expansionary policies, as these are the policies in practical international relations and world economy that are most likely to lead to the theory of adjustment strategies of countries and the role that central banks play in adjusting the economy to particular challenges.

In this article we will explain what strategies are employed in changing the focus of growth and contraction in expansionary and contractionary monetary policy relations and how ESIC University’s Master’s Degree in International Relations and Global Economy (MIRGE) provides an understanding of this. Thus, the correct development of this area of knowledge ensures that policies can be formulated and in practice used at the level of policy.

What is an Expansionary Monetary Policy?

It should first be noted that central banks are called upon to act as a last resort when a certain segment of the population or a region of a country is in a dire state or when the economy in general is recovering slowly. This is referred to as an expansionary monetary policy. In this policy approach, the last resort lender attempts to strengthen impairments by reversals of slack through increasing the money supply in the country and lowering interest rates. This naturally gives rise to a greater inclination to borrow as well as increasing the amount of spending by both consumers and businesses, thus creating greater demand in the economy and eventually leading to economic expansion.

Differences between expansionary and contractionary monetary policy

An expansionary monetary policy can be implemented through the use of the following key instruments:

Reducing Loan Payment Amounts:

When the central bank reduces the interest rate, it automatically causes the cost of monetary borrowing for people and businesses to shrink, which in turn raises the demand of purchasing goods and services.

Purchase and Sale of Securities in the Secondary Market:  

To execute Open market Operations under this activity, pension management central banks are allowed to create funds by buying government-backed securities such as bonds in the secondary market. Consequently, the infusion of funds into the banking sector takes place, and this, in turn, creates a greater supply of money while simultaneously lowering  interest rates.

Increasing the Demand for Investments and Loans:

There are situations when interest rates are low and a central bank may want to increase the volume of money, but this need not be in the short term, rather the purpose is to increase long term investments.

For instance, expansive measures were evident during the global financial crisis, when the Federal Reserve lowered interest rates and began to take large quantitative easing measures, which had been aimed at improving the state of economic processes.

The Role played by an Expansionary Monetary Policy:

It is common knowledge that for an expansionary policy to be effective, the country needs to provide incentives for spending and investments to be made, which will increase the level of economic activity.

One alarming trend that the unemployment figures appear to support is that the number of unemployed workers is lower in the USA at times when the majority of the businesses are scaling up and hiring workers. When a company wants to find new concepts and therefore new project ideas, it must borrow under the most favorable circumstances, which occurs when interest rates are low.

The Meaning of Deploying a Contractionary Monetary Policy:

However, contractionary policies thrive alongside them and they must be put into motion when the economy is termed as being in a boom state, where on the other hand, inflation is too high in the economy but the supply side expansion is barely sufficient to meet the rising level of demand.

These minimizing strategies are established to deter inflation that would otherwise be detrimental to the long-term growth of an economy owing to over-expansion in monetary supply and high interest rates. Optimization of inflation as well as controllable growth rates to avoid bubbles and galls in economic indicators.

Expansionary monetary policies involve the following guidelines:

To curb over-investment, central banks normally undertake measures aimed at increasing the cost associated with borrowing funds. As a consequence, aggregate demand falls and simultaneously, so does the rate of growth of the economy.

When central banks feel that it isdesirable to rein the economy, they do so through open market operations, that is, through the sale of Government Securities. Such funds are sold on the market, thus curtailing monetary circulation.

Restricting of Commercial Bank Lending:

In response to the instructions provided by the central banks, commercial banks are unable to lend more funds. This can be done by requesting these banks to hold additional reserves with the central bank.

The monetary policy deployed by the central banks has certain notable contractions. For example, starting in the late seventies and during the first part of the eighties, the Federal Reserve increased the interest rate, which impacted exchange stability.

Advantages of a Contractionary Monetary Policy:

The downside of such policies is the topic of our discussion today. During the contractionary policy phase, the economy is slowly recovering and has significant risks of sinking into recession.

These are long term measures employed to compliment gross expenditures and increase inflation rates that would cause a hindrance in business enterprises. These measures are quite tough, but they are useful whenever there is a need to strengthen a currency and stabilize an economy with an increase in market supply and demand.

International Relations that Determine Monetary Policy Issues

Why the policies of countries are dependent on international relations and countries play a major role in the policies of other countries, because of the non-policy functions of various organizations, such as IMF and World Bank etc. These explanations suggest that there is a rationale for the international coordination of monetary policy and as such, this shifts power away from the national central banks, such as in the case of opera students. ESIC University’s Master’s Degree in International Relations and Global Economy (MIRGE) is for students who tend to be very popular in ever-increasingly globalized markets. The focus of the curriculum will be on how international order is influenced by the central banks of leading countries.

Why Enroll On ESIC University’s MIRGE Program?

The competent authorities of the university anticipate and plan well to respond to  the dynamic nature of the demand for economics in the employment market when they hire economics graduates over time upon the completion of their undergraduate studies. Issues like inflation, exchange rates and globalization are mostly dealt with from the international perspective. Students will be able to analyze the various dimensions of political and economic systems and their application to monetary systems.

Important Aspects of the MIRGE Program:

• Interdisciplinary Nature: Political Science, Economics, and International Business are synthesized to form a broader view of world economic systems.
• Global Perspective: The program aims to study how both fiscal and monetary economic policies affect global markets.
• Practical Knowledge: Students gear up for the real world by acquiring practical skills in economic analysis, policy-making, and the development of global business strategies.
• International Opportunities: Students at ESIC University are able to participate in international internships, international study trips, professional and international organization contacts and more.

Students become engaged in the complex and ever-changing international economy and are thus properly qualified to assume high-ranking official posts in state agencies, international financial institutions, non-government organizations and transnational corporations.

Expansionary and contractionary policies emphasize however differ and it is safe to say that they are indeed two ends of a spectrum. For instance, expansion aims at increasing the economic growth and employment, whereas on the other hand, contractionary policies attempt to reduce inflation and sustain stability.

For those who are interested in studying these policies in an international context, ESIC University’s Master’s Degree in International Relations and Global Economy (MIRGE) is extremely interesting from the educational viewpoint, as it aims to foster both a theoretical and a practical application, which is critical in the management of such a dynamic environment.