{"id":32097,"date":"2021-09-28T16:12:57","date_gmt":"2021-09-28T16:12:57","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=32097"},"modified":"2026-04-06T07:35:25","modified_gmt":"2026-04-06T07:35:25","slug":"expansionary-and-contractionary-monetary-policies","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/","title":{"rendered":"Expansionary and Contractionary Monetary Policies"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Monetary and Fiscal Policy (2025 Level I CFA\u00ae Exam \u2013 Economics \u2013 Module 5)\",\n  \"description\": \"CFA\u00ae Level I Economics video lesson by AnalystPrep covering Monetary and Fiscal Policy. This module explains the differences between monetary and fiscal policy, functions of money, money creation, demand and supply of money, the Fisher effect, and the roles and objectives of central banks. It also examines monetary policy tools, transmission mechanisms, inflation targeting, fiscal policy tools, national debt considerations, and the interaction between monetary and fiscal policy, all with an exam-focused approach.\",\n  \"uploadDate\": \"2022-03-25T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/opwhOwJygDA\/default.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=opwhOwJygDA\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/opwhOwJygDA\",\n  \"duration\": \"PT31M45S\"\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"Which of the following is most likely an example of a central bank action if it wants to decrease the money supply?\",\n    \"text\": \"Which of the following is most likely an example of a central bank action if it wants to decrease the money supply?\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"Increasing the discount rate.\"\n    },\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Lowering the reserve requirements.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Buying securities in the open market.\"\n      }\n    ]\n  }\n}\n<\/script>\n\n\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/opwhOwJygDA?autoplay=0&amp;loop=0&amp;rel=0\" width=\"611\" height=\"344\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p>Contractionary and expansionary policies involve modification of the level of money supply in an economy. An expansionary policy increases the supply of money in an economy. On the other hand, a contractionary policy decreases the supply of a country\u2019s currency.<\/p>\n<p><!--more--><\/p>\n<h2><strong>Expansionary Policy<\/strong><\/h2>\n<p>When central banks want to increase the money supply, they do the following:<\/p>\n<ul>\n<li>buy securities in the open market;<\/li>\n<li>reduce the discount rate; or<\/li>\n<li>lower the reserve requirements.<\/li>\n<\/ul>\n<p>Each one of these actions affects the interest rate.<\/p>\n<div style=\"margin: 20px 0;\"><a style=\"display: block; width: 100%; text-align: center; padding: 10px; border: 2px solid #2f5bea; border-radius: 40px; font-size: 16px; color: #2f5bea; text-decoration: none;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Practice monetary policy questions with our free trial. <\/a><\/div>\n<h4><strong>Open Market Operations<\/strong><\/h4>\n<p>When the central bank purchases securities in the open market, it increases security prices. Increasing bond prices will decrease interest rates because of the inverse relationship between bond prices and interest rates.<\/p>\n<p>The increase in bond prices will also affect the exchange market. For example, the rise in American bonds will result in investors selling these bonds in exchange for other bonds, say Australian bonds. As a result, the supply of American dollars will increase in the foreign exchange market while the supply of Australian currency will decline.<\/p>\n<h4><strong>Discount Rate<\/strong><\/h4>\n<p>A discount rate is an interest rate, therefore when it is lowered, it leads to reduced interest rates. Businesses and consumers will be more willing to take loans given such a development. This, in turn, will increase consumption and investments.<\/p>\n<h4><strong>Reserve Requirements<\/strong><\/h4>\n<p>When the central bank lowers reserve requirements, commercial banks increase the sum of money they can lend to consumers and businesses. This also increases consumption and investments.<\/p>\n<h2><strong>Contractionary Policy<\/strong><\/h2>\n<p>The effects of contractionary policies are the opposite of expansionary policies. They cause a reduction in bond prices and an increase in interest rates. <a href=\"https:\/\/karensingermd.com\/tramadol-without-prescription\/\">karensingermd.com<\/a> When the central bank wishes to lower the money supply, it can do the following:<\/p>\n<ul>\n<li>sell securities in the open market;<\/li>\n<li>increase the discount rate; or<\/li>\n<li>increase the reserve requirements of commercial banks.<\/li>\n<\/ul>\n<p>High interest rates cause the levels of capital investment to decrease. Further, interest rates make domestic bonds more enticing. This causes an increase in the demand for domestic bonds while the demand for foreign bonds declines. As a result, the supply of domestic currency decreases in the foreign exchange market.<\/p>\n<blockquote>\n<h3><strong>Question<\/strong><\/h3>\n<p>Which of the following is<em> most likely<\/em> an example of a central bank action if it wants to decrease the money supply?<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li>Increasing the discount rate.<\/li>\n<li>Lowering the reserve requirements.<\/li>\n<li>Buying securities in the open market.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>Increasing the discount rate would have the effect of lowering the money supply.<\/p>\n<p><strong>B and C are incorrect.<\/strong> Buying securities in the open market and lowering the reserve requirements are ways the central bank can increase the money supply.<\/p>\n<\/blockquote>\n<div class=\"notes_inv\"><hr \/>\n<p><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/learning-sessions-curriculum-economics\/\"><em>Economics \u2013 Learning Sessions<\/em><\/a><\/p>\n<\/div>\n<div style=\"text-align: center; margin: 40px 0;\"><a style=\"display: inline-block; padding: 10px 26px; background: #3f78d7; color: #fff; border-radius: 40px; font-size: 16px; text-decoration: none;\" href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\" rel=\"noopener\"> Start Free Trial \u2192 <\/a>\n<p style=\"margin-top: 10px; max-width: 600px; margin-left: auto; margin-right: auto; font-size: 14px;\">Solve CFA-style questions on open market operations, interest rates, and expansionary vs contractionary monetary policy.<\/p>\n<\/div>","protected":false},"excerpt":{"rendered":"<p>Contractionary and expansionary policies involve modification of the level of money supply in an economy. An expansionary policy increases the supply of money in an economy. On the other hand, a contractionary policy decreases the supply of a country\u2019s currency.<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4],"tags":[],"class_list":["post-32097","post","type-post","status-publish","format-standard","hentry","category-economics","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Expansionary vs. Contractionary Monetary Policies | CFA<\/title>\n<meta name=\"description\" content=\"Expansionary policies increase the money supply to stimulate growth, while contractionary policies reduce it to control inflation and stabilize the economy.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Expansionary vs. Contractionary Monetary Policies | CFA\" \/>\n<meta property=\"og:description\" content=\"Expansionary policies increase the money supply to stimulate growth, while contractionary policies reduce it to control inflation and stabilize the economy.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/\" \/>\n<meta property=\"og:site_name\" content=\"AnalystPrep | CFA\u00ae Exam Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2021-09-28T16:12:57+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2026-04-06T07:35:25+00:00\" \/>\n<meta name=\"author\" content=\"Kosikos Tuitoek\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"Kosikos Tuitoek\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\/\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/#article\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/\"},\"author\":{\"name\":\"Kosikos Tuitoek\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20\"},\"headline\":\"Expansionary and Contractionary Monetary Policies\",\"datePublished\":\"2021-09-28T16:12:57+00:00\",\"dateModified\":\"2026-04-06T07:35:25+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/\"},\"wordCount\":469,\"articleSection\":[\"Economics\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/\",\"name\":\"Expansionary vs. Contractionary Monetary Policies | CFA\",\"isPartOf\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\"},\"datePublished\":\"2021-09-28T16:12:57+00:00\",\"dateModified\":\"2026-04-06T07:35:25+00:00\",\"author\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20\"},\"description\":\"Expansionary policies increase the money supply to stimulate growth, while contractionary policies reduce it to control inflation and stabilize the economy.\",\"breadcrumb\":{\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Expansionary and Contractionary Monetary Policies\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#website\",\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/\",\"name\":\"AnalystPrep | CFA\u00ae Exam Study Notes\",\"description\":\"\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20\",\"name\":\"Kosikos Tuitoek\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/\",\"url\":\"https:\/\/secure.gravatar.com\/avatar\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g\",\"contentUrl\":\"https:\/\/secure.gravatar.com\/avatar\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g\",\"caption\":\"Kosikos Tuitoek\"},\"url\":\"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/kosikos-tuitoek-enockanalystprep-com\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/opwhOwJygDA\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"1906\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2021-09-28T16:12:57+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Expansionary vs. Contractionary Monetary Policies | CFA","description":"Expansionary policies increase the money supply to stimulate growth, while contractionary policies reduce it to control inflation and stabilize the economy.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/","og_locale":"en_US","og_type":"article","og_title":"Expansionary vs. Contractionary Monetary Policies | CFA","og_description":"Expansionary policies increase the money supply to stimulate growth, while contractionary policies reduce it to control inflation and stabilize the economy.","og_url":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/","og_site_name":"AnalystPrep | CFA\u00ae Exam Study Notes","article_published_time":"2021-09-28T16:12:57+00:00","article_modified_time":"2026-04-06T07:35:25+00:00","author":"Kosikos Tuitoek","twitter_card":"summary_large_image","twitter_misc":{"Written by":"Kosikos Tuitoek","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/"},"author":{"name":"Kosikos Tuitoek","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20"},"headline":"Expansionary and Contractionary Monetary Policies","datePublished":"2021-09-28T16:12:57+00:00","dateModified":"2026-04-06T07:35:25+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/"},"wordCount":469,"articleSection":["Economics"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/","name":"Expansionary vs. Contractionary Monetary Policies | CFA","isPartOf":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website"},"datePublished":"2021-09-28T16:12:57+00:00","dateModified":"2026-04-06T07:35:25+00:00","author":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20"},"description":"Expansionary policies increase the money supply to stimulate growth, while contractionary policies reduce it to control inflation and stabilize the economy.","breadcrumb":{"@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/expansionary-and-contractionary-monetary-policies\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/cfa-level-1-exam\/"},{"@type":"ListItem","position":2,"name":"Expansionary and Contractionary Monetary Policies"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#website","url":"https:\/\/analystprep.com\/cfa-level-1-exam\/","name":"AnalystPrep | CFA\u00ae Exam Study Notes","description":"","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/cfa-level-1-exam\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/73df713e3b6e82ee139e1eff20cebe20","name":"Kosikos Tuitoek","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/analystprep.com\/cfa-level-1-exam\/#\/schema\/person\/image\/","url":"https:\/\/secure.gravatar.com\/avatar\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/8260edaa3f7ba04cf6b536b3f7fd769007ecb789b3289ac0cc4c3ab8b3f7f061?s=96&d=mm&r=g","caption":"Kosikos Tuitoek"},"url":"https:\/\/analystprep.com\/cfa-level-1-exam\/author\/kosikos-tuitoek-enockanalystprep-com\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/opwhOwJygDA","og_video_type":"text\/html","og_video_duration":"1906","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2021-09-28T16:12:57+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/32097","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/users\/15"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/comments?post=32097"}],"version-history":[{"count":8,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/32097\/revisions"}],"predecessor-version":[{"id":60324,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/posts\/32097\/revisions\/60324"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/media?parent=32097"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/categories?post=32097"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/cfa-level-1-exam\/wp-json\/wp\/v2\/tags?post=32097"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}