Expansionary Policy
Government or central bank actions designed to stimulate economic growth by increasing the money supply or raising government spending.
What is Expansionary Policy?
Expansionary policy refers to fiscal and monetary measures that increase aggregate demand to boost output, employment, and growth — most commonly deployed during recessions or periods of high unemployment. Monetary expansionary tools include cutting interest rates, quantitative easing, and forward guidance signaling low rates for an extended period. Fiscal expansionary tools include tax cuts, direct transfer payments, and increased government expenditure. The risk of expansionary policy is that if applied too aggressively or for too long, it can generate inflationary pressure or unsustainable public debt levels.
Example
In response to the COVID-19 recession of 2020, the US government deployed historic expansionary fiscal policy. The CARES Act and subsequent relief bills totaled over $5 trillion in spending and direct payments. Simultaneously, the Federal Reserve cut rates to near zero and purchased over $4 trillion in Treasury and mortgage-backed securities. The combined stimulus drove the shortest US recession on record — just two months.