How does expansionary monetary policy influence aggregate demand?

• A. By raising interest rates to curb inflation
• B. By reducing government spending
• C. By decreasing interest rates to boost borrowing and spending
• D. By increasing taxes on consumers

Answer: (C)

Expansionary monetary policy significantly influences aggregate demand primarily by decreasing interest rates, which encourages borrowing and spending. When a central bank implements expansionary monetary policy, it typically lowers interest rates, making loans more affordable for consumers and businesses. This reduction in borrowing costs prompts consumers to take out loans for major purchases, such as homes and cars, and encourages businesses to invest in capital expansions, such as new equipment or facilities.

As borrowing increases, consumer spending rises, which is a critical component of aggregate demand. Moreover, businesses are more likely to invest when the cost of financing is lower, leading to increased production and job creation. Consequently, the overall level of demand in the economy increases, which can help stimulate economic growth.

In contrast, other options like raising interest rates, reducing government spending, or increasing taxes do not support the intention of expansionary monetary policy as they typically result in lower levels of aggregate demand. Higher interest rates would discourage borrowing, and higher taxes or reduced government spending would limit the money available for consumption, both of which would counteract the goals of stimulating the economy through increased demand.