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> Expansionary monetary policy reduces the costs of loans and investments How does it do that? Suppose I want to borrow $1M to build a factory, but nobody (b
by mac01021 10y ago
> Expansionary monetary policy reduces the costs of loans and investments
How does it do that?
Suppose I want to borrow $1M to build a factory, but nobody (banks, venture capitalists, whatever) can afford to invest in my endeavor.
So the fed prints a bunch of money, causing 5% inflation. Now the bank can more easily afford to loan me $1M, because that $1M is worth less.
But now I need a $1.05M loan to build my factory.
- mac01021 10y agoWhy was I downvoted? I was just asking a question about monetary policy, hoping the GP (who clearly knows more than I) would come back and answer it.
- gnaritas 10y ago> How does it do that? By lowering interest rates which encourages borrowing and thus spending and thus economic activity. > So the fed prints a bunch of money, causing 5% inflation. Printing money causes monetary inflation, but does not directly cause price inflation so you don't need 1.05M to build your factory. Printing money can eventually lead to price inflation if too much money is printed for too long, but that doesn't mean all money printing causes price inflation as that lever can be turned both ways. Lower interest rates to spur spending and get the economy moving again and then once out of danger raise them again.