ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Inflation is caused when the money supply in an economy grows at faster rate than the economy’s ability to produce goods and services. In our auction economy the production of goods and services was unchanged, but the money supply grew from round one to round two.

Detailed explanation-2: -What Are Some Examples of Expansionary Monetary Policy? The Federal Reserve often tweaks the Federal funds reserve rate as its primary tool of expansionary monetary policy. Increasing the fed rate contracts the economy, while decreasing the fed rate increases the economy.

Detailed explanation-3: -Description: In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.

Detailed explanation-4: -Buying bonds is a tool of expansionary monetary policy because buying bonds will lead to an increase in output. Buying bonds increases the money supply to decrease interest rates.