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The federal government gets involved in the country’s money supply through the central bank. In the real-life, examples of the involvement include buying and selling of treasury bonds and bills. According to Hung, & Thompson (2016), such a strategy is referred to as an open market operation. Other examples include the variation of banks reserves involved and direct involvement which occurs through increasing or decreasing public expenditure or variation of tax rates.
The expansionary monetary policy is one of the strategies employed by the federal government to boost economic activity. The policy, however, has not been effective in the past. As Romer & Romer, (2013) explain, the main factors for the ineffectiveness include the uncertainties in the economic environment and the inordinate discretionary power entrusted to the policymakers in the federal government. Consequently, the policy makers have been adopting policies that target short-term gains on employment and growth (Goodhart, 2015). The recurrent adoption of excessive short-term goals has led to elevated levels of inflation and an unstable economy, hence weak economic growth.
Nevertheless, the federal government still uses the expansionary monetary policy since it has significant advantages in the economy. Most evidently, the system usually aims at increasing money supply in the economy. According to Ma (2015), an increase in money supply may help to recover an economy that in recession through improved production leading to increased corporate taxes and income taxes. As a result, the government can offer better social services to the citizens thus enhance their lives. Additionally, an expansionary monetary policy lowers the rates of interest, which makes it possible for upcoming and medium sized firms to expand and encourages foreign investments (Romer, & Romer, 2013). The businesses create employment opportunities while injection of foreign currency into the economy leads to improved exchange rates, enhancing economic development.
All in all, the expansionary monetary policy has not been effective in the past years, but the federal government still uses it. The primary reasons for continued use include creating jobs, to manage inflation rates, and to ensure economic growth and stability. To conclude, the expansionary monetary policy has significant benefits but should be used with caution.
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