Easy monetary policy is used to stimulate an underperforming economy by giving consumers easy access to money through low interest rates. This leads to increased spending and economic activity, but can also lead to inflation.
Monetary policies are generally used to stimulate an otherwise lackluster economy. The economy may be underperforming due to factors such as low consumer consumption and lack of easy access to cash, lines of credit and loans. In this case, the major bank in that economy, which is primarily responsible for monetary policy, will engage in a practice known as easy monetary policy. The main attribute of this type of monetary policy is that it tries to manipulate the economy so that consumers have easy access to money.
The main method by which the central bank disseminates easy monetary policy is through the reduction of interest rates. When interest rates on loans and other forms of credit are low, this will encourage more people to take out these breaks. When people are able to get loans, mortgages and other forms of credit, they can spend more on consumer goods and other items, consequently increasing the activity rate in the economy.
An example of the concept of easy monetary policy can be seen in a couple’s decision to get a mortgage to buy a house. While easy monetary policy is in effect, the couple will likely have many choices about what type of mortgage to get. They will also likely find it easier to meet mortgage requirements since those standards are often relaxed during times of easy monetary policy. The couple may also find that mortgage interest rates are very low during these times, giving them the confidence to go ahead and buy the home. This kind of behavior is exactly what those behind the introduction of easy monetary policy have in mind.
Conversely, when the opposite of easy monetary policy is applied, it will raise rates to obtain those loans and lines of credit, making it more difficult for people to get money to spend. Even if simple monetary policy stimulates the economy, this type of rampant consumption and spending often has an unintended consequence in the form of inflation. Excess demand for goods and services promoted by easy access to money often lead to a situation where high demand leads to a corresponding increase in the price or value of those goods and services.
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