Monetary policy   Goals of monetary policy   RBA Charter   Role of underlying inflation   Implementing monetary policy   Tightening of MP   Loosening of MP   How other rates change   Pre-emptive decisions   'Open mouth operations' Exchange rate intervention  Monetary policy stance   Expansionary policy  Monetary policy neutrality    Restrictive MP   Transmission mechanisms   MP and economic goals   low inflation Growth/jobs  MP strengths and weaknesses

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 Course notes quick navigation

1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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Expansionary monetary policy

An expansionary monetary policy occurs when the level of the cash rate lies at a low enough level to be exerting a stimulatory effect on the economy.  Currently, monetary policy is considered to be expansionary if the target cash rate is below approximately 3.5%.

An expansionary monetary policy is ordinarily associated with a policy loosening where it is expected that the lower cash rate (or lower interest rates) will stimulate economic activity. However, it is possible for monetary policy to become relatively more expansionary even without a loosening of policy.  This can occur if the economy is growing strongly, or indeed overheating, and the RBA does not change the cash rate.  This scenario is commonly referred to as a more accommodative stance of monetary policy.  

It is important to acknowledge that an expansionary policy can still exist even if there is a tightening of monetary policy. For example, over 2014, if the RBA tightened monetary policy by increasing the cash rate from 2.5% to 3.00%,  the new 3.00% cash rate is still low enough for the setting to remain expansionary.  In other words, the interest rate setting in the economy would remain low enough to be exerting a stimulatory effect on real GDP, despite the tightening of the policy over the period.

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