Page 206 - A Canuck's Guide to Financial Literacy 2020

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1. Decreasing Interest Rates – The government would adjust and reduce short term
interest rates. This would enable banks to borrow short term loans in order to fund
their liquidity needs. These low interest rates would reduce the cost of borrowing for
banks. Lower cost of borrowing for banks would mean a lower interest rate for
consumers. A lower interest rates would increase the money supply in the economy.
2. Lower Reserve Requirements – Banks are obligated to hold a set amount of
reserves with a central bank. When the central bank is looking to increase the money
supply, they would lower the reserve requirements for the bank. This in turn would
result in more loans handed out to consumers at low interest rates. More loans would
increase the money supply in the economy.
3. Buy Government Bonds – To increase the money supply, the government may use
open market operations and buy back large amounts of government bonds from
institutional investors. This purchase of government bonds would mean more money
in the pockets of investors that they can spend, boosting the money supply.

Through an expansionary monetary policy, the government is able to:

▪ Boost Economic Growth – Reducing the cost of borrowing would encourage citizens
to spend more and encourage businesses to invest in larger projects.
▪ Increase Inflation – Increasing the money supply would also increase inflation. This
would result in a higher price of goods and services.
▪ De-value Currency – Boosting the money supply in the economy would reduce the
value of domestic currency. This currency devaluation would mean more exports to
foreign countries. Foreign countries would be able to buy more products from the
domestic country and contribute to the increase of the money supply.
▪ Create Jobs – As exports and capital investments are increasing, this would result in
extra jobs available for the consumer. There is a positive correlation with an
expansionary monetary policy and reduction in unemployment.